Once the last mortgage payment is done, most people jump for joy. It is the perhaps the biggest wish that most people have after they buy their dream home. In spite of everything, expert’s advice homeowners not to pay off the mortgage quickly because it would, after all, not are in their best interests. The interest rates may be down, there is money in the bank and you would be tempted to finish off with the mortgage once and for all. Here are some reasons that say why you shouldn't:
Payment penalty
You might get hit with an early termination fee or an exit fee when you pay off the loan early. This is especially true for people who received mortgage before 1 July 2011, because the new law says that for all loans that were taken after that day, the debtor would not have to pay exit fees. If you have a fixed rate home loan, then you would be charged with a break fee. If the interest rates have dropped after you took the loan, then the break fee would be high. Your credit provider would enlighten you on this fact, so you can rethink your decision.
Having a strategy to pay off debts
You may have more than one debt. Perhaps the loan on your car would have higher interest rates than the loan on your house. Which should you pay off first - the car or the house? Definitely the car, because it has the highest interest rate.
Do not max out your retirement savings
Suppose the loan amount to be paid is $1875, pay just that much and do not round it off to $2000. Thought it might look good in a financial move in the short term, it wouldn’t do much good in the long term. Investing those dollars elsewhere would be a better option.
Paying through your retirement plans
Most people have the habit of withdrawing money from their retirement plans in order to pay off the mortgage. However, there is chance they could get stung by the IRS when tax time comes around. You would have to pay income tax on the lump sum withdrawal from your retirement account unless (1) you are over 59 ½ (2) the funds are in the Roth IRA that you've held for more than 5 years.
Paying loans for two kinds of property
You might have an owner-occupied dwelling and an investment property and you pay mortgage for both. Do not pay down the mortgage on both properties at once. If you receive any additional income, then keep it aside for paying the mortgage for the owner-occupied property. This is perfect for getting tax benefits related to investment loans.
Looking at other ways to pay off the mortgage amount
A financial consultant would advice you on the different methods to pay off mortgage without touching your principal. If there are ways to create a solid investment plan, then you can make the proceeds from that investment to pay off the mortgage. As long as that investment is income generating, you would never have to worry about paying off the mortgage.
If you come by any additional income, then it would be a good idea to invest the same in another property or perhaps in the share market. This would definitely give you more returns in the long run. You might need an additional cash reserve for those unforeseen emergencies in your life. So, though you may be tempted to use your cash to pay off the debt, keep aside a lump sum amount for those. After all, you wouldn't like to wait out for the insurance company to fulfill any medical emergencies, do you?