Despite popular belief, one’s inclination to pay off their mortgage as fast as possible isn’t necessarily a foregone conclusion. If for nothing else, one of the best personal finance hacks I have encountered promotes the idea of maintaining your monthly mortgage obligations. I’m convinced it may not be in your best interest to pay off your mortgage as fast as possible. Of course, there are exceptions, but most people don’t have the financial means to make paying off their mortgage worth their while.
For what it’s worth, maintaining your mortgage payments may coincide with more benefits than you are aware of. And therein lies the secret to one of today’s best personal finance hacks.
Whether you realize it or not, continuing to pay into your monthly mortgage obligations remains one of today’s best personal finance hacks. At the very least, there are several reasons you may not want to pay off your mortgage immediately, but perhaps none are more important than the following three:
1. Missing Out On A Great Tax Deduction
The real estate industry has become ubiquitous with very attractive tax benefits, so much so that a large contingent of investors have chosen their respective path as a means to collect on said incentives. That said, tax benefits aren’t relegated solely to investors; your average homeowner can also get in on the action. Pretty much anyone with a mortgage has the potential to benefit from great tax incentives. It’s worth noting, however, that there is one tax benefit that today’s homeowners have not only grown accustomed to, but have also come to rely on: mortgage interest deduction.
Those homeowners that itemize their taxes each year are typically allowed to deduct the interest they pay on their mortgage from their income taxes. According to Bankrate, taxpayers “can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt (the limit is $500,000 if married and filing separately). Any interest paid on first or second mortgages over this amount is not tax deductible.”
Even with the 30-year fixed-rate average recently dropping to its lowest level we have seen all year (3.86 percent with an average 0.5 point), today’s homebuyers could expect significant deductions in their coming tax returns. It’s entirely possible for today’s homeowners to deduct thousands of dollars from their income tax every year as a result. This particular deduction is only made available to those paying interest on their mortgage. If you decide to pay off your mortgage entirely, you lose the ability to deduct the interest come tax time.
2. You Could Drastically Reduce Liquidity
As Investopedia so eloquently puts it, ”liquidity is a measure of their ability to pay off debts as they come due.” I, however, like to think of liquidity is another measure for identifying the amount of funds one currently has at their disposal. Those with a lot of liquidity, for example, most likely have access to the funds they need in the event an opportunity presents itself. Those with limited liquidity, on the other hand, either have fewer funds to tap into or their money is tied up somewhere else.
Limited liquidity doesn’t necessarily represent a bad situation, but it is typically something most people want to avoid. Those with relatively low liquidity inherently do not have immediate access to capital. That said, they could find themselves backed into a corner in the event unforeseen circumstances require more funds than they were expecting.
Medical emergencies, for example, may saddle some people with the burden of paying a lot of money in a moment’s notice. And it’s not only medical emergencies people need to worry about — life is full of surprises. Do you have enough money to send your kids to college? What if you find yourself without a job? Perhaps you are getting married soon and have large expenses on the horizon.
If your current level of liquidity won’t cover costs, you may find yourself in an extenuating circumstance — one that could be easily rectified with access to capital. If, however, your level of liquidity is relatively high, it’s safe to assume you will have more funds to cover unexpected costs. And therein lies one of the greatest benefits to not paying off your mortgage in full: higher liquidity. Those that don’t pay off their mortgage in one, large lump sum are bound to have more money at their disposal.
Most people don’t have enough money to pay off their mortgage and simultaneously maintain a “generous” savings account. That said, it stands to reason that the majority of people that do decide to pay off their mortgage won’t have a lot of funds left over. And while it’s certainly enticing to rid yourself of monthly mortgage obligations, you effectively eliminate any liquidity in the process.
What’s more, the money you retain from not paying down your mortgage can be used to — get this — make more money. Those that spread the money they keep across a diversified portfolio of investments, not the least of which includes real estate, stocks and bonds, should find themselves with more options should the need for cash arise.
3. Liquidity Represents An Opportunity To Invest
On the surface, paying off a mortgage and ridding yourself of monthly debt obligations sounds like a great idea. Who wouldn’t want to stop paying thousands of dollars a month? As it turns out, mortgages account for most of the average homeowner’s income in many states. It only makes sense that someone would want to stop making mortgage payments, but I digress; that’s just one perspective. While I won’t argue that not having a mortgage sounds great, I am more interested in the alternative.
As I already alluded to, maintaining your mortgage should increase your liquidity, meaning you have more access to capital. And it’s what people have the potential of doing with said capital that has me excited. With the cash you retain from not paying down a mortgage, savvy investors can invest their money in things like real estate and real estate investment trusts (REITs). In other words, it’s entirely possible to turn your liquidity into a secure stream of income with a few savvy investments.
Consequently, paying down your mortgage will effectively limit your ability to invest in multiple streams of income. Instead, it will limit your access to available funds. And while the equity you generate could grow in value, it’s never a good idea to bank on it. It could be years before you see growth in your home’s value.
The Final Verdict
It stands to reason that nobody in their right mind would want to pay a mortgage any longer than they have to. In fact, most homeowners feel inclined to pay down their mortgage as fast as possible. The idea of ridding yourself of one of your largest expenses is nothing, if not intoxicating, but I digress. Paying down your mortgage with one, lump sum identifies a lack of foresight. And while you could certainly argue that there are benefits to not paying thousands of dollars in mortgage obligations every month, I maintain that it could be in your best interest to avoid doing so. In retaining the money you would have paid down the mortgage with, you maintain your liquidity. In doing so, your access to capital remains intact, and your ability to invest increases dramatically.
While many personal finance hacks would have you eliminate debt, I suggest you do the opposite — at least as it pertains to paying off your mortgage. Ridding yourself of such a large sum of money can be a hinderance, even if it does rid you of monthly mortgage payments.