Paying Your House Off vs. Carrying a Mortgage

Without mortgages, most people would never be able to afford to buy a house. However, once the mortgage is signed, most people can't wait until it's finally paid it off. Depending on your personality and financial circumstances, accelerating your mortgage payoff might not be right for you.

Alternative Investment Options

Compared to other loans and investments, mortgages have a relatively low cost. Depending on your level of risk tolerance and your mortgage's interest rate, you may be able to earn more than you pay in interest on the mortgage by investing the amount of money on your loan. For example, if your mortgage charges a fixed rate of 4 percent but you can make a 7 percent return investing the same amount of money, that 3 percent gap represents profit to you. However, investing returns aren't guaranteed, so if the market crashes, you could lose all the money that you could have used to pay off your debt.

Emergency Savings

Just because you have enough money to pay off your mortgage doesn't mean it's a great idea. If you use all of your free cash to pay off the mortgage and then incur an unexpected expense, you could have to carry a balance on your credit card or take out other personal loans with higher interest rates. Realtors.com recommends an emergency fund with enough money for three months' worth of expenses.

Tax Benefits

Keeping your mortgage allows you continue to claim the interest as a tax deduction. While this doesn't completely offset the cost of the mortgage, it does reduce the net cost of the loan. The higher your income tax bracket, the larger your savings. For example, if you fall in the 35 percent tax bracket, every dollar in interest paid saves you 35 cents on your taxes. If you're going to pay off your mortgage only to borrow money for something else, not only will you likely pay a higher interest rate, but also the interest likely isn't tax deductible.

Emotional Benefits

Depending on your personality, having outstanding debt, especially a mortgage, can be an emotional drain. By paying it off early, the peace of mind you get can be priceless. Though your house might not generate the same return as the stock market, it also doesn't carry the same risk in normal economic times. In addition, even if your home's value does drop, you can still live in it; you can't say the same about a mutual fund.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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