Our only debt is our home mortgage. We have 19 years left if we continue making payments as scheduled. I’m anxious to pay it off sooner, but also need to save for our kids’ college (4 year old & 2 year old). Should we put 100% of our focus towards our kids’ college, and ignore the mortgage? Or 50/50? Or knock out the mortgage as quick as possible and then ramp up college savings? — Karen
You’re not alone in feeling “anxious” about paying off a home mortgage. But understand that because money is powered by humans — and humans are emotional beings — sometimes the financial decisions we make out of fear are not in fact the best options.
“The emotional answer is that some people just cannot forgo the feeling of accomplishment and supposed security of not having a mortgage,” explains Ryan Poage, a certified financial planner in Kansas City, Missouri. “In many cases, if not the most, that behavior wins.”
In fact, Poage goes so far as to say emotional behavior more times than not overrules mathematical fact when it comes to paying off a mortgage early. “People frequently do precisely the wrong thing because of incorrectly taught conventional wisdom.”
In this case, it’s important to unpack your motivation for wanting to pay off a mortgage early, and put your loan in context with other financial priorities like saving for college, retirement and a nest egg.
Roger Ma, the founder of the New York City-based financial planning firm lifelaidout, puts it another way: “The optimal thing to do from a math or spreadsheet perspective may not be the optimal thing to do to give you the greatest peace of mind.”
A mortgage is generally a “good debt”
There’s a personal finance maxim that says a home mortgage is a “good debt.” This means that you should buy assets that appreciate in value, in this case your home. Home loans these days are often locked in at a low interest rate and offer tax deductible interest. Home loans are good because they free up your liquid cash so you can invest in other funds that could yield higher returns.
That being said, not all mortgages are a good deal.
“I’d want to get a better understanding of why it makes you anxious,” Ma notes. “Is it a 30 year fixed rate mortgage or an adjustable rate mortgage? Do you currently have a high interest rate on the loan or are the monthly payments higher than you’d like?”
If you’re paying a lot of interest, it may make sense to look into refinancing, Ma says.
Put your loan in context to other priorities
Make sure you clarify your financial goals and what you’d get out of paying off a mortgage early: Is your interest rate too high? Is there a chance you”ll move? What works for you might not work for someone else, so it’s important to consider your life circumstances: How is your job security? What is your family’s overall spending? Do you have some money set aside for emergencies? Is there potential for relocation? Inheritance?
“Paying off a mortgage is great, but it needs to be weighed against a multitude of other factors, particularly when there is only so much discretionary cash to go around,” says Juan C. Ros of Lamia Financial Group, Inc. “If they plan to move in 5 or 10 years, why pay off the mortgage early? That’s cash that can be redirected for other purposes. Mortgage pay-off is generally low on the priority list if available cash is limited.”
In other words, ask yourself how much cash you need, because once you sink it into a home it’s harder to get it back.
“As soon as you make additional principal payments on a mortgage you are losing liquidity – you have to either sell or borrow to get at that money if needed,” explains Todd Youngdahl of Washington Wealth Adivsors.
And consider another holy grail of personal finance: You can get a loan to borrow money for a home or education, but you can’t borrow money for retirement.
Paying for college
Many advisers told CNNMoney that it’s not easy to pay off everything and fund for your children’s education. But there are options, and it’s always better to start early. Ask yourself how you want to pay for your children’s education: Do you want to co-sign a loan? Pay on a portion? Invest in a 529 plan?
“Higher-ed expenses inflate at a higher rate than most other things, which means you should start saving sooner rather than later,” explains Ros. “You also don’t say if you intend to pay 100% of college costs, or 50%, or something else — every parent has different notions about how much college to pay for.”
Furthermore, educate yourself on funding options and look into whether or not your state offers tax deductions contributions. Savingforcollege.com is a good resource that offers calculators and lays out your 529 plans and investment options.
Like life, personal finance is a series of trade-offs so there is no right answer for everyone. Make sure you talk through what your priorities are and seek the appropriate resources and help before making your decision.
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CNNMoney (San Francisco) First published July 6, 2017: 6:23 AM ET