Keep The Mortgage Or Pay Off The House?
Posted by David Schneider | September 18, 2007

One of the biggest financial decisions people make in life is whether to keep their mortgage or pay off the house. It is human nature to try and reduce the amount we pay out in bills. We naturally steer away from debt all our life, but it may be a smart financial move to hang on to a mortgage for a few more years. The decision to pay off your house mortgage or carry it for a span of time is really dependent upon your personal financial situation. There are a few things to consider when making this all-important decision.

The Tax Issue

If you own a home and have a mortgage, you know what an advantage you have at tax time. Mortgage interest and property taxes are tax-deductible and can add up to quite a break, especially if you live in a large, expensive home. If this is your situation you may find it beneficial to keep your mortgage as opposed to paying of the house; but for many Americans living a middle class existence in a suburban home, it may not add up to that much. There is even the distinct possibility that you have no tax break at all. Remember that every dollar you save in a 401(k), individual retirement account, or any other tax-deferred plan, saves taxes immediately and your money increases tax-free in the long term. The taxes are then due only when you withdraw, usually when your income and tax rate are lower.

Where the Funds Come From

If you are taking the money from another important account, like a 401(k), to pay off your mortgage, you are probably better off keeping the mortgage. It will actually make you money to pay off the mortgage at a regular pace and put any extra cash into a tax deferred account for saving. It is an especially bad move to pull money out of a retirement plan to pay down a mortgage when the retirement plan is 100 percent taxable upon distribution. It just doesn’t make good financial sense.

Limited and Fixed Incomes

Most of us will be living off of a fixed and limited income when we retire. This is important to consider and decide if your income after retirement will allow for mortgage payments. Make out a potential budget and figure out if it is even possible to pay your mortgage in the retirement years. Also consider your mortgage’s APR.

Debt

What if you have no other debt? If you have played your cards right and gotten a little lucky then you may have a mortgage as your only debt. If that is the case it would benefit you to pay of the mortgage as opposed to saving the money in a high yield account. At that point you’d have no debt at all and that would be great to face at retirement.

This doesn’t have to be a hard or stressful decision. Take your time and consider your financial situation from all angles. You have all you need to make a careful, informed decision.