HIGHLIGHTS: Here are four reasons paying off your mortgage early can actually be a BAD financial move. There might be prepayment penalties . . . it might be better to put more toward retirement . . . you might get tax penalties you're not prepared for . . . and it often makes more sense to invest and get a better return.
FULL STORY: Everybody thinks about paying off their mortgage early, if they have the money. Sometimes it's actually BETTER to stay in debt. Here are four reasons why.
1. There might be a prepayment penalty. Most mortgages don't have these. But when they do, you might not always know it. It could be as much as 3% of the outstanding balance. Check your contract before you pull the trigger.
2. If you're not saving for retirement or your kids' education, you should put money toward those first. The taxes are deferred, so you make interest on what you WOULD have paid the government. And mortgage interest is tax-deductible, so you get even more tax savings.
3. You might have to pay more taxes. In some places there's something called a mortgage recording tax. You pay it whenever you open a new mortgage, and it's about half a percent of the total principal.
If you pay your mortgage off early, and then in the future you take out a home equity loan, you'll pay that tax again. Whereas, if you just saved the money you could have avoided the home equity loan altogether.
4. You could get a better return by investing. Usually you'll get higher interest rates on investments than you'll pay on your mortgage. Up to twice as much. So invest all your extra money, and you might have a LOT more money when you pay off the house.