Questions to ask before paying off a mortgage early

The question of whether to pay off that home mortgage ranks right up there with “What should we name our new baby?” or “Where should we take a vacation this year?” It may even be a more important question, one that must be deliberated before arriving at an answer that provides peace of mind and makes sense to your pocketbook. Why isn’t this a simple decision to make? Many issues enter into it, ranging from your feelings about debt to your future financial plans.

Ask yourself:

How do I feel about having debt? Some individuals say they don’t sleep well at night when their debt is high, while others are very comfortable with debt. If you are bothered by carrying debt, one way to potentially sleep better is to pay off that home mortgage.

Do I have a better option for that money? When you no longer have mortgage payments, you will need a plan for that money—before it dwindles away. One option is to open or add to a retirement account and fund it regularly. Even if you don’t have an account, make some long-range goals and see that you save for them using the money. Some people want to get going on their bucket lists, but they should weigh the pros and cons of extravagances when there likely is a better use of the money.

Would investing the money for my family’s nest egg be a good alternative? In many cases, yes. If you have ten or more years before retirement, that nest egg could grow appreciably with the money saved from paying off the mortgage and then investing it. Placing it in a retirement fund is a good solution. Having no major debt hanging over your head when you do retire can provide you with new flexibility in your later years.

What is the downside to paying off my mortgage? There actually are some important considerations in doing this. Loss of tax savings is one downside to factor in. As you likely know, many homeowners realize a significant savings on their taxes annually by taking a large mortgage deduction. If you have counted on that savings each year at tax time, you should take that change into account. Do so before you take the step to pay the mortgage off. Keep in mind, though, that those tax deductions in your home will decrease the longer you live there.

Another downside is whether you are robbing Peter to pay Paul. In other words, if you have outstanding debt from credit card balances or a college loan, paying those off is often a better option than reducing your mortgage. Crunching the numbers will help you make a decision on this.

Keep this number in mind: 28 percent. This is the percentage of your gross monthly income that your mortgage payment, including principal, interest, taxes and insurance, shouldn’t exceed. If it does, perhaps your bigger question to ask is whether to downsize into a less expensive home.

What if I don’t have enough cash to pay off my mortgage? Many families don’t have that amount of cash available. You would need to pay off an amount that is equal to the principal of your house, which could be sizeable. If doing this will jeopardize your ability to pay off other important expenses, such as your children’s college tuition or even being able to add to your emergency fund, you should reconsider.

Many individuals know they need to adjust their goals and savings plans as the years go by. Getting advice from a financial professional will help set you on the right path.