Financial Planning for Deed Holders: Keep the Mortgage?

Some deed holders, hoping to pay their loans down early, send extra money toward their mortgage principal each month. Why are they eager to pay down a mortgage balance faster than the loan agreement requires? Is that the best approach from a financial planning standpoint?

Here, we go through some factors that prompt some deed holders to pay their mortgage loans off quickly, and why other people might prefer to keep their loans as long as they can. You be the judge.

The Opportunity Cost Factor

For most deed holders, the quandary comes down to how much they’ll pay in mortgage interest over the loan term, versus how much the stock market pays ordinary investors through their 401(k)s or retirement accounts. If you pay down your home loan faster than you must, you’ll save a good deal in interest over the course of your mortgage.

How does this work? Pre-paying some of your loan principal lowers the balance that a lender charges interest on. Every extra payment against the principal lowers the total interest over time. A home buyer might pay more monthly to the loan servicer by adjusting the autopay amount on their account page online.

But if you take that “extra” money and invest it in your retirement account, you get potential returns on your investments over the years.

Which is best? That is the question…

Your loan interest amount is a known factor. In contrast, your potential stock market gain is an unknown factor.

Still, you can look at past performance of the stock market to get an idea of what you could earn in future years. Then you have something to go on when making your decision. If you need guidance, speak to a financial pro. Managed retirement accounts typically provide customers access to the account managers for guidance.

The Emotional Factor

For many deed holders, being free of creditors is almost as precious as being free of a landlord.  

We might call it the emotional factor. We might call it risk management. We might call it prioritizing autonomy over ties to a system of debt and interest charges.

No matter how they might look at it, some people seek freedom from debt. And that’s a personal decision, to be respected.

It’s still important to make that decision with the benefit of financial realities.

The Liquidity Factor

Sending all the extra money you can scrape up to your mortgage servicer might not be the best move. You might approach this decision by asking yourself:

Is my mortgage interest rate lower than the returns a high-yield CD would pay? Would it be wiser for me and my family to put the money there?

A further advantage to keeping the money in CDs or savings accounts is liquidity. You might want to use the money for something like going back to school, setting up a small business, or making upgrades to your home. What if you need to replace a major appliance or take care of unexpected repairs? What if your job situation becomes unstable?

It’s harder to pull money out of your home equity than it is to free it up from an account.

And so, if you have a low-interest (say, under 5%) mortgage, it may be best to leave it in place and not worry that you need to be repaying the company faster.

If you’re wondering what’s best for you or your household in the long run, make time to talk to a reputable professional.

Buying one’s own home can bring a measure of financial safety. Keeping monthly housing bills predictable is one way a mortgage can ease a deed holder’s journey through unexpected money challenges.

The Interest Rate Factor

Now that we’ve said all that, let’s look at the other side of the coin. Holding onto a mortgage isn’t the optimal plan for every deed holder. There are situations when paying off a mortgage early does make perfect sense. This is especially so if your interest rate is at the high end.

If you can gather the cash to pay off a high-interest mortgage, a finance expert might encourage you to do it. When the prevailing mortgage interest rates are more than 6%, for example, a home buyer could get a 30-year, fixed-rate loan but put as much cash down as possible — and pay the principal down as fast as possible.

If a borrower cannot build more value in a retirement account than they need to pay in mortgage interest, hanging onto a mortgage isn’t an optimal choice.

The U.S. Federal Reserve is starting to cut interest rates. What does this mean for mortgage applicants? 

The Flexibility Factor

But some deed holders need time. They don’t have the wherewithal to pay more than the minimum that’s due every month. If you’ve made a home purchase, you know the feeling. You’re paying for heat and electricity, furnishings, home and garden maintenance, homeowner’s insurance, property taxes, and perhaps homeowner association dues as well.

So it can take serious planning for a household to get into a position to pay more against the loan principal. This is where the flexibility of a long-term mortgage comes in. A mortgage holder has many options, and the very fact that we are discussing when and how to pay if off is a testament to the control it puts in the deed holder’s hands.    

In most mortgage loan agreements, there’s leeway to start paying extra at any time, with no penalty. This empowers a borrower to shorten the mortgage term. At the same time, by reducing the remaining balance, the borrower lightens the interest load.

And consider the deed holder who’s approaching older adulthood. A senior homeowner might decide that paying off major debts will be helpful when it’s time to get an estate in order for the next generation. Many people approaching their retirement years feel motivated to clear up debts for their peace of mind. Doing so relieves them of the concern that their heirs will need to deal with their debts.

Read this if you’re wondering: Does taking out a mortgage in older adulthood make sense?

In the Long Run

Deeds.com does not offer case-specific advice on how long is best to keep home loans active. That’s because so many situation-specific variables go into the calculus of holding onto your home loan versus paying it off rapidly.

Nevertheless, we hope this article has given you a basic orientation to the question, and possible answers. If we have raised even more questions for you to consider, great! The questions are raw materials to bring to a financial planner, and for your own due diligence.