June 12th, 2013

6 Reasons Savvy Homeowners Are Not Paying Off Their Mortgages Early

 

6 Reasons Savvy Homeowners Are Not Paying Off Their Mortgages Early | Credit Karma Blog

**Today’s guest post is contributed by Catey.**

 

For many years, homeowners have likely heard the same financial advice: Pay down a mortgage as quickly as possible. But these days, many financial advisers are singing a different tune, telling clients that in some cases it makes sense not to pay off their mortgages early. After all, mortgage rates are hovering near historic lows at around 3.8 percent, and homeowners can get a tax deduction for having a mortgage.

Here are six reasons savvy homeowners choose not to pay off their mortgages early.

1. They Have Higher-Interest Debts

Homeowners who have credit card or other high-interest debt often should prioritize paying off that debt before paying off a lower-interest mortgage. So, if a homeowner has a mortgage with a 4 percent interest rate and a credit card and/or a loan with an interest rate that’s more than 4 percent (most credit cards have rates of at least 11 percent), the homeowner should pay down the credit card or loan as quickly as possible and pay just the minimum on the mortgage each month – at least until that higher-interest debt is paid off.

2. They Don’t Have an Emergency Fund

Most financial advisers recommend that people have an emergency fund — at least six months’ worth of living expenses in the bank — so that if something happens such as a job loss or accident, they won’t have to put that expense on a high-interest credit card or take out a loan. If homeowners don’t have any “emergency” savings, it may make financial sense to pay just the monthly minimum on their mortgages until they’ve built up a sufficient emergency fund.

3. They Are Not Taking Advantage of an Employer’s 401(k) Match

If an employer matches a homeowner’s 401(k) contributions — employers who offer a match tend to put in 50 percent of every dollar an employee puts in up to about 6 percent — the employee should contribute at least up to what the employer matches before racing to pay down a mortgage. Because the 401(k) match is literally free money, it makes better financial sense to take advantage of the unbeatable opportunity. An added bonus is that a 401(k) offers a tax advantage. Employees put in the money tax-free, and though they must pay taxes on it when it’s withdrawn, they are likely to be in a lower tax bracket in retirement than they are now.

4. They Think They Can Get Better Returns Elsewhere

Homeowners who pay more on their mortgages than the minimum owed are using cash they could be using for other purposes, such as buying other investments that might offer better returns.

5. They Seek Diversification

Financial advisers often stress the importance of diversification. Investors should have their money in a variety of different investments such as stocks, bonds and real estate so that if any one type of investment drops in value, at least the investor has other investments to rely on. In other words, people shouldn’t put all their (investment) eggs in one basket. When it comes to their mortgages, many homeowners only pay the minimum so that they will have the money to invest in other areas as well.

6. They Want Liquidity

Homeowners who pay off their mortgages as quickly as possible can tie up large chunks of their money in their homes. Because real estate is not a very liquid investment (it typically takes a lot of time to sell a home and get out the cash put into it), this move can tie up homeowners’ cash for months. Thus, homeowners who seek more liquidity may want to put that extra cash elsewhere.

 

To be sure, there are myriad reasons to pay down a mortgage early. If homeowners have plenty of savings and investments and no other debts, there’s little reason to pay mortgage interest for longer than needed. Plus, having a home paid off gives many people significant peace of mind. Thus, homeowners considering whether to pay down a mortgage early should talk to their financial advisers.

 

Catey

Catey Hill is a writer and editor whose work has appeared in/on The Wall Street Journal, SmartMoney, Worth, Seventeen, Forbes.com, MarketWatch.com, the New York Daily News, and dozens of other publications and websites. She is also the author of “Shoo, Jimmy Choo! The Modern Girl’s Guide to Spending Less and Saving More” (Sterling, 2010). You can read more at CateyHill.com.

Follow Credit Karma!

    Facebook: http://www.facebook.com/CreditKarma

    Twitter: http://twitter.com/creditkarma

    Google Plus: https://plus.google.com/+creditkarma

    YouTube: http://www.youtube.com/creditkarma

    Subscribe to the Credit Karma Blog

Continue Reading | 6 Comments | Twitter | |

May 6th, 2013

The Importance of Home Insurance Scores

home insurance

For one out of four Americans, “cash only” is a way of life. 17 million Americans lack access to any type of formal bank account and are classified as “unbanked.” In addition, 51 million Americans do access basic bank services such as a savings account, yet they still rely on alternative financial institutions as well. These individuals might frequent check-cashing joints, fall prey to payday lenders, and often incur exorbitant fees associated with such alternative banking methods.

Continue Reading | 46 Comments | Twitter | |

September 10th, 2012

Sometimes, Numbers Can Be Misleading

money math th

Personal finance theory is filled with mathematical formulas and calculations, but the successful pursuit of financial independence often requires picking a route that may conflict with what the numbers would initially suggest. Take our investment in housing for example. Naturally, we would hope for a gradual rise in real estate values after we purchase a home because after all, we want to make money in real estate just like the Jonses. Yet, the best scenario for many people is not a price rally. And this is true even if you are a homeowner. Let me illustrate my own situation, which is common in America today.

Continue Reading | No Comments | Twitter | |

May 29th, 2012

5 Ways to Increase Your Home’s Resale Value

home for sale th

It's no secret that housing prices have suffered over the past few years. In order to sell your home, you need every advantage you can get over your neighbors. If you are about to sell and want to receive your desired price, you will want to dedicate time to working on your home. Below are some tips to help you increase your homes value and sell faster.

Continue Reading | 3 Comments | Twitter | |

September 9th, 2011

Credit Karma Answers: How do I build credit to buy a house?

Ready to take the plunge into becoming a homeowner? Make sure your credit is in tip-top shape first! Check out these tips, from our Credit Advisor, Justine Rivero.

Continue Reading | 6 Comments | Twitter | |

August 30th, 2011

Infographic: To Rent or To Buy?

rentbuy

Think buying a home is no longer a solid investment? Think again! MortgageRefinance.com created the following infographic, using some of the findings from Trulia's American Dream Survey. Check it out!

Continue Reading | 1 Comment | Twitter | |

August 24th, 2011

Wednesday Roundup: Don’t Believe These 3 Mortgage Myths

mort th

Mortgage rates are near historic lows. Predictions that credit downgrade for the U.S. would send mortgage rates soaring haven’t come to pass (not yet, at least). So far, there are still chances to get incredibly low mortgage rates, whether you are buying a home, or refinancing your current mortgage. MoneyNing

Continue Reading | No Comments | Twitter | |

August 12th, 2011

Friday Roundup: Why You Should Consider a Roommate Agreement

rental th

Getting a roommate is a great way to share costs and lower rent. But living with someone is not always easy, as these roommate horror stories illustrate. One way you can limit problems is by creating a roommate agreement. This is a formal document that spells out living arrangements and responsibilities. It may sound odd to create a legal contract, but it is often a sensible idea. Here are three reasons why. Savvy Sugar

Continue Reading | 2 Comments | Twitter | |

August 5th, 2011

Friday Roundup: Reality TV Programs Tune Into Foreclosed Homes

tv th

Reality TV Programs Tune Into to Foreclosed Homes. With more foreclosed homes hitting the market every day, thousands of them are ending up on reality television. Over the next few months, several different television networks will feature new reality shows highlighting these foreclosed homes by building on the ever-popular “house flipping” theme. Cash Money Life

Continue Reading | No Comments | Twitter | |

July 22nd, 2011

Friday Roundup: 5 Essential Real Estate Closing Tips & Process Checklist

re th

Buying a home is a lot of work, but it’s a lot of fun too. Amid all of the excitement of the buying process, most buyers manage to stay organized. Money Relationship

Continue Reading | No Comments | Twitter | |

Archives

Categories