More likely than not, your Lake Havasu home represents the largest monetary investment you've ever made in your life. So, it might be tempting to pay off your mortgage as soon as possible. After all, the more you pay down your principal, the sooner you build up your equity. However, it might not be the best idea to pay off your mortgage early. Yes, I realize that sounds counterintuitive to everything you've ever heard before. But, there are actually a few good reasons to continue making a monthly mortgage payment.
Reasons to Not Pay Off Your Mortgage Early
You Haven't Created an Emergency Fund Yet
A few weeks ago, I wrote about creating an emergency fund. In essence, this provides quick access to funds to cover you when an unforeseen emergency happens. Instead of scrambling to find money to cover your insurance deductible, you already have it set aside. Also, it's a good idea to have money set aside to cover your monthly bills in case someone in your household loses their job or becomes unable to work for a long period of time. If you don't have an emergency fund set up, you might want to hold off on paying off your mortgage early. Funnel that money into an emergency savings account instead.
Investing in Stocks Provides a Bigger Return
Do you currently have a stock portfolio? Think about holding off on an early mortgage pay-off. Why? Let's say that the interest rate on your mortgage is 4%. That's the best return you'll get if you pay off your mortgage now. However, over the long haul, stock market investments net an average of around 7-8%. That's twice the return. Of course, that all depends on which stocks you invest in and how they perform. Some fare better while others fare worse. Talk to your investment broker to see which route may be the best for you.
You Lose Some Valuable Tax Breaks
As a Havasu homeowner, you're entitled to certain tax breaks. Mortgage interest, property taxes, the standard deduction. These are just a few of the breaks you receive simply because you pay a monthly mortgage. If you pay off your mortgage early, you are no longer entitled to these. In turn, that could put you in a higher tax bracket.
A Mortgage Helps Offset Inflation
Finally, did you know that carrying a mortgage actually helps offset inflation? It's true! How? Let's say you're paying $1200 a month on a 30-year fixed-rate loan. At an average 2% inflation per year, that $1200 will be equal to paying just $750 a month in 25 years. As the cost of everything else around you goes up, your mortgage actually becomes cheaper in comparison. That's why you might not want to pay off your mortgage early.
Of course, everyone's situation is different. If your ultimate goal is to be debt-free and you can afford to do it, you may still want to pay off your mortgage early. Discuss all of your options with your accountant or investment broker before making any big decisions.