Paying down your mortgage faster can seem smart — it’s always a good idea to pay off your debts as soon as possible, right? Not always.
Making extra payments on your mortgage? Many people do — they’re anxious to get that mortgage paid down as quick as they can. But especially with interest rates this low, that might not be the best place to put that next dollar.
So what are the top five reasons to postpone that mortgage burning party?
1. Your emergency fund is on the scrawny side
Before you send another extra dollar to your mortgage company, beef up your cash reserves. Sure, you are saving more in interest than you’re earning in your bank account, but what happens if you lose your job? You can’t rip out your bathtub and sell it on eBay for grocery money. And the bank isn’t likely to loan you the money back while you’re unemployed.
Likewise, if you’re still saving for retirement, putting that extra money toward your retirement savings is a smart move. You’ll be taking advantage of the power of compounding by putting the money to work for you sooner. You get an extra bonus if adding to your retirement savings garners you more of an employer match.
2. You are carrying other debt, like credit card debt or a car loan
Those consumer loans should be paid down first. It’s likely your credit card interest is higher than your mortgage rate, and your mortgage interest may offer you a tax deduction that you’re not going to get from a credit card or car loan. Work on reducing your consumer debt to zero before even considering paying down your mortgage.
3. Capture the arbitrage
Remember not that long ago when online banks were paying 3.5%? That’s about what you can get a 30-year fixed mortgage for these days. Economies are cyclical; it’s only a matter of time until those deposit rates return, and go even higher. And when they do, you’ll be glad to have your money earning more in the bank than the bank is charging you on your mortgage. Imagine the scenario where you could pay off your mortgage if you wanted to, but instead watch the interest you’re earning outpace the interest you’re paying.
4. Those extra dollars could be put to use elsewhere
Perhaps your career could use a boost from some coaching or certifications? The additional money you’ll earn year after year from investing in your working future may return loads more than the savings on your mortgage.
5. Keeping a mortgage is a hedge against inflation
I remember when my mother-in-law paid off her mortgage years ago. She jokingly wondered what she would do with the whopping extra $92 a month she now had. Chances are, when they were a young married couple with a few children, that $92 seemed like a fortune. But years later, it was peanuts. That’s what will happen to your mortgage, too. As prices all around you go up, you can enjoy having that one bill that will remain the same. That payment will become cheaper and cheaper, relatively speaking, as time goes on.
Read more: Should you pay off your mortgage quickly?