Financial advisers have definite opinions when clients ask the age-old question about repaying the mortgage ahead of schedule. Five short years ago, most advisers would have encouraged every client to pay off mortgage early and live a debt-free lifestyle. Current economic conditions have caused many people to rethink carrying a mortgage in the climate of economic uncertainty. Anyone who is not confused about the storm of changing opinions has been ignoring the financial news and trends. Speaking of economic uncertainty, mortgage brokers sydney is a great resource if you are facing some instability in Australia.
Homeowners with mortgages will have to make some personal decisions about the financial priorities that will bring about their personal financial freedom. Prioritizing repayment of debts to align with long-term goals will provide some insight for making the decision to pay off mortgage early.
Choose to Keep the Mortgage If . . .
• Emergency fund is lacking – Planning ahead for car repairs or potential job loss is essential for any homeowner. Three to six months of income should be set aside in a savings account to avoid incurring debt. Minor adjustments to the monthly budget will reveal where funds are available for saving money. Prioritize saving over spending in every area of life to reach life-long goals.
• Non-mortgage debt is outstanding – Credit card debt and student loans weigh heavily on the household budget. All other debts should be repaid ahead of schedule instead of choosing to pay off mortgage. Ongoing monthly expenses must be evaluated against the higher priority of repaying debts that incur interest. A cable TV bill can be cancelled to increase the available funds for debt repayment.
• Company match is available – An opportunity to receive “free” money paid into a 401(k) fund is a high priority. Increases to the employee contributions will ensure that the company match option is maximized. Retirement seems far off, but this source of future money is more important than repaying the mortgage.
• College is on the horizon – Families with teenagers know that money is scarce because of their interests and ever-increasing needs. College savings accounts are a higher priority than the choice to pay off mortgage ahead of schedule. Saving thousands of dollars requires careful planning and discipline.
• Wage earners lack life insurance – Family dreams must be protected by sufficient life insurance. Few people sit in the living room and contemplate the unthinkable, but prudent adults know that anything can happen. A stay-at-home mother should be insured, too. Her ability to care for the children would have to be paid for if something were to happen to her.
• Cash is needed elsewhere – Money required to make additional payments on the mortgage might be needed for another priority. Home improvements, medical bills and family lifestyle can be higher priority items than efforts to pay off mortgage ahead of schedule. Extra money is scarce for most people, so careful decisions are important for household priorities.
• Upside down mortgage – A home that is worth less than the outstanding mortgage debt is a prime candidate for foreclosure. Efforts to save money in the emergency fund are more important that repaying a loan in this situation. Loss of employment can happen at any time, and the additional funds will be helpful for relocating the family, if necessary.
• Retirement fund is behind schedule – Interest rates are extremely low, so many people are directing the additional funds toward efforts to save 10-20 percent of the household monthly income for retirement. Sufficient preparation for retirement is harder to recover than extra money for repaying the home mortgage ahead of schedule.
Pay Off Mortgage Early If . . .
• Debt-free living is important – The number of people who are embracing debt-free living has been growing rapidly in recent years. This approach to life delays financial purchases until the money has been saved in the bank. Every decision is measured against the need and affordability. A home mortgage is acceptable to some people in the debt-free lifestyle. Other families feel freer financially when the household does not have to make a monthly payment.
• Paying interest is repulsive – Interest payments are seen as wasted money in some circles. Paying for the privilege of being in debt is not appealing to people who were not raised with credit cards and home mortgages. Depression-era seniors feel this way because of the remarkable losses endured by their parents. The younger generation realizes the heavy burden they are carrying because of interest on student loans. Mortgages require hefty interest payments that are not considered acceptable by some families.
• Retirement is near – A move into a home that is smaller than the family home is popular with those who are within five to ten years of retirement. More expensive smaller homes require a mortgage if the move was to a more expensive location. Many future retirees have not included a mortgage payment in their expense planning. Repaying the mortgage might be essential for staying within the monthly budget during the retirement years.
• You cannot live in an annuity – People have started to realize that a home without a mortgage is a remarkable place to live. Contentment comes easily when the property is owned free and clear. Putting money into an investment does not make logical sense to those who wonder where they would live if the income stream dried up entirely. Economic conditions have caused many people to embrace this philosophy because of the need to live somewhere if things get worse.
Personal Preference Trumps Advice
Every personal situation presents unspoken challenges that might be addressed by efforts to pay off mortgage early. Any adviser that offers immediate answers to the question is not listening. Multiple factors weigh into the decision to embrace lifestyle changes and focus on repaying the mortgage. Hardship should not result from directing additional funds to the efforts to repay the home mortgage ahead of schedule.
Everyone in the household will be impacted by decisions to trim the household budget. Buy-in from every person will reduce the number of disagreements that will result when the answer to wants must be “no.” Future rewards of family vacations and more entertainment outings might be the best deterrent for impatient members of the family.