There are several factors to consider if you have the ability to pay off a mortgage. From saving more money to having more money on hand, it’s a balancing act that anybody can learn.

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Establish a cushion

Do your budget. Add up all your expenses, including those that only occur sporadically, such as trips to the veterinarian or dentist. Average everything into a monthly total and multiply by three. Financial experts tell us we should have savings on hand to cover at least three months of expenses. Job loss, medical emergencies, car wrecks could all happen. Having a cushion is essential. Past the three-month cash reserve, we should have another three months of money put aside. This secondary savings should be liquid but can be tied up in a certificate of deposit, bonds or stocks.

Are you getting a better return from savings?

With the Federal Reserve Bank’s policy of quantitative easing, interest rates are incredibly low on any secure investments. For example, savings accounts that are 100 percent protected by the Federal Deposit Insurance Corporation (FDIC) are protected. But if all of your savings were in a savings account, your yield over the past year was pretty dismal.

Bank of America® is now paying 0.01 percent on its savings accounts. Let’s say that you had invested some of your savings in a mutual fund. This past year the Vanguard 500 Index Admiral Fund appreciated 32.33 percent.  Over the last 10 years it grew 7.39 percent, far better than the current mortgage rate of around 4.5 percent.

How old is your mortgage?

The initial payments on a 30-year-fixed-rate mortgage are nearly all interest. At about half way through, the balance shifts to paying more principal than interest on your home loan. Most people acquire the ability to pay off a mortgage when the term is ending. Take a close look at your amortization and see where you are before deciding to pay off the balance.

You can do both

Paying down more of your principal every month will give you a guaranteed return on your money, so there is a lot to be said for it, but you don’t have to pay all of it off. If you have enough financial reserves set aside—and you’re ready to take on a bit of risk—why not take that extra money and invest in the stock market? The money there is not guaranteed however. So if you don’t know much about stocks, a good option is a no-load mutual fund where the shares are sold without a commission (and the shares are distributed directly by the investment company). A Standard and Poor’s 500 index fund invests in 500 of the largest companies in the U.S. across many industries. Because the holdings are so diverse, they minimize the volatility an investor would get by investing in, say, a technology index fund instead.

There is one other aspect of this to consider: Your mortgage interest is tax deductible, meaning that its payment is effectively subsidized. Talk with your accountant and see how much more you’ll have to spend in taxes if you lose your mortgage interest deduction.

Being in a quandary as to whether or not to pay off a mortgage is a good problem to have. Psychologically, it might feel better to pay off your mortgage than put that money into a mutual fund. Owning a home outright probably feels better than buying shares in the stock market, so don’t discount the emotional component of your decision.

Get the best home equity loan and HELOC rates on our mortgage page.


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