It’s a hot-button topic—and one on which retirement-planning pros, financial advisors, economics professors, and other fiscal pundits often have differing views. Today, we’ll offer you the official Villa Nova Finance Group answer to the question, “Should I pay off my mortgage early?”

Well, should you? While, to a degree, it depends on why you’re asking, in general, it’s not a good idea. Let’s review what you should be doing with your extra cash to help you understand when it’s wise to consider prepaying your mortgage.

Cash is King

Whether we’re business owners or not, many of us know that healthy cash flow is the lifeblood of a successful organization. What you may not be aware of though, is that the same goes for you as an individual.

It’s critical that you have adequate cash flow, both to enjoy the type of lifestyle you want and cover both expected and unexpected costs. Perhaps you want to have enough cash on hand to be able to support an expensive hobby, travel, fill your home with beautiful things, or donate freely to your favorite nonprofit organization. Or maybe you’ve got two kids destined for college, and you want to be able to afford their tuition so they can graduate from school free and clear. Whatever your plans are, you need to ensure you have enough liquid cash on hand to make it all happen—otherwise, you could end up relying on credit cards or taking out expensive loans instead.

Build Your Emergency Fund

Before any working toward any other savings goals or financial milestones, you should focus primarily on socking away enough to be able to tap into your personal wealth when a crisis hits: whether it’s extensive car repairs, a medical emergency, or an unexpected job loss, any of these situations could leave you in need of a large amount of cash. Experts recommend that you should sock away enough liquid cash to cover three to six months’ worth of your living expenses.

So, what about if you DO have that much saved? Shouldn’t any extra cash you have laying around go toward your principal? Nope. There are still plenty of other places your money should be going first.

Max Out Your Retirement Savings

Only 25% of Americans have managed to save $200,000 or more, which means the vast majority have far less than the $1,000,000 in retirement savings that many experts recommend. This means that, even if you’re fortunate enough to have at least $30K stashed away, it’s still not time to ask yourself, “Should I pay off my mortgage?” Instead, throw any extra cash you have at your tax-advantaged savings accounts, such as your IRA or 401(k). You’ll get a tax break for doing so (though this will only matter if you itemize—see more on this below) AND you’ll put yourself in a much better position come retirement.

Plus, if you have a serious emergency that requires a large amount of cash (such as a long-term illness or very serious injury), you can withdraw funds from your retirement savings to cover the costs, but your home is not a liquid asset. Let’s say you used a $20,000 inheritance to pay off your mortgage. If you experience an emergency, the only way to access the cash is to re-mortgage the house, take out a home equity loan, or sell the home. All of these things take time. And you’ll need to pay closing costs and interest on the loan, whereas if you withdraw from your retirement fund, depending on the rules of the fund, you’ll have just a single, one-time penalty fee—or perhaps even no fee at all.

Invest Instead

Sure, you’ll save on interest if you prepay your mortgage. But the return on your investment will probably be higher—often considerably so–if you took that extra cash and invested in the stock market instead, especially if you make continued investments over a long period of time.

But isn’t your home an investment? Yes, and each time you make a payment, you’re investing in your home. However, it’s important to diversify your assets. This way, if the housing market slumps or crashes, and your home isn’t worth as much, you’ll still have cash in your investments and savings accounts.

Save For the Wants

Remember earlier when we talked about your dreams and plans? Whether it’s a trip to Australia or Ivy League school for your daughter, you need to identify what you want to accomplish and set aside the cash to make it happen before paying off your mortgage. What good is a house free and clear if you don’t have the cash available to truly enjoy your life and do what you want? Why prepay your mortgage when you can help your son begin his career without college loans hanging over his head? These are critical questions to ask yourself. Yes, saving is about sacrifice, but if you’ve got enough in your emergency fund and are wisely invested in stocks and your retirement accounts, it’s really time to think about spending some of your money on people or things that are important to you.

Mortgages Are Cheap Money

With interest rates still quite low, a mortgage is one of the most affordable loans available. Plus, while you can deduct your interest payments come tax time, very few Americans will itemize their deductions now that the standard deduction has significantly increased. If you have a higher-interest-rate mortgage, you may want to consider refinancing into a lower interest rate rather than paying off the loan. You’ll save on interest and keep extra cash in your pocket each month.
If you’ve paid off all your debt, saved up more than six months’ worth, have a healthy stock portfolio, and still want to pay off your mortgage, then it’s a safe bet that you’re pretty financially savvy. So, yes, if you’ve hit all your other goals, go ahead and pay off that mortgage!

What to Do Next

If you’re like most Americans, you’re truly not ready to take the step of paying off your mortgage. But if you’re asking yourself, “Should I pay off my mortgage?” or have any other questions about your finances, borrowing strategies, and debt management, contact Villa Nova Financing Group. We’ll take a holistic look at your financial picture and help you make borrowing and spending decisions that best support your overarching financial goals.