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Should I pay off my mortgage?

When does it make sense to pay off your mortgage? In most cases, never.

One thing Covid-19 highlighted is the importance of cash reserves. But when you pay off a mortgage early you give tens of thousands of dollars to your lender and you lose access to that cash. The only way to get it back is to sell the house – or get another loan (putting you right back where you were).

When you get a big mortgage, you minimize the amount of cash needed to buy a house. That lets you keep more of your cash – which is thus available to buy food and medicine in a crisis.

Here are 11 reasons you should not pay off your mortgage early:

#1: It doesn’t affect your home’s value. Your home’s value will rise or fall whether or not you pay off a mortgage.

#2: A mortgage won’t stop you from building equity in the house. The value of your house is likely to grow over the next 20 years. You’ll build equity over time even if your principal balance never declines.

#3: A mortgage is cheap money. Mortgages are one of the cheapest ways you can borrow money.

#4 and #5: A question people often have is “Should I pay off my mortgage or invest?” But those two choices aren’t mutually exclusive.

Your mortgage interest is tax-deductible. And mortgage interest is tax-favorable. The interest you pay on loans to buy, build or substantially improve a qualified residence (up to $750,000) is tax-deductible if you itemize your deductions.

If you’re in the 35% tax bracket, every dollar you pay in mortgage interest saves you 35 cents in federal income taxes. You save on state income taxes too. Say you’re in the 32% tax bracket and you get a 3% mortgage. That loan costs you 2.04% after taxes.

Meanwhile, say you invest money and earn 3%. Long-term capital gains are commonly taxed at 15%, meaning your after-tax profit is 2.55%. Thus, even if your investments earn no more than what you pay for your loan, you’re still making a profit!

#6: Mortgage payments get easier over time. You probably remember struggling to make your mortgage payment when it was new. But over time, that payment becomes cheaper relative to your income – especially if yours is a fixed-rate loan. Payments on such loans will never rise, but incomes usually do.

#7: Mortgages allow you to sell without selling. Your house may have increased in value since you bought it and you might now worry that its value will fall. Can you protect your home equity without having to sell? Yes! Simply get a new mortgage and pull the equity out of the house!

#8 and #9: Mortgages allow you to invest more money and to invest it more quickly. Mortgages allow you to create more wealth than you otherwise would. People who ask if you want to make a big monthly mortgage payment or a small monthly payment are asking the wrong question. The correct question is not about the amount of money you want to pay monthly, but the amount you want to invest. It’s all about wealth creation, not debt elimination.

#10: Mortgages give you greater liquidity and flexibility. By keeping control over access to your money, you maintain liquidity. If you succeed in paying off the loan, you might fail in saving for college or being able to pay bills in the event of a job loss, medical problem, marital issue or other family concern.

#11: You’ll never get rid of your monthly payment, no matter how hard you try. Even if you pay off your mortgage, you’ll still have to pay property taxes and homeowner’s insurance. Thus, your goal of “getting rid of the mortgage payment” is impossible!

So don’t bother trying to make your mortgage go away. Instead, your focus should be to create wealth so that you can comfortably afford the cost of living in and owning your home.

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