Benefits and Disadvantages of Paying Down Your Mortgage
The question of whether or not to pay down one’s mortgage often comes up when assessing your financial goals. Especially now that tax season has just come to an end you may giving your finances some extra thought. The truth is, there is no right or wrong answer as it all depends on your short and long term goals. From taxes to cash flow there are things to consider if you make regular payments or add additional monies towards the principal to pay it down. Here is a closer look at both of the pros and cons. Not every point, but most, will apply to both your rental properties as well as your own home.
Of course, paying down your mortgage faster means that you will own the property free and clear sooner. Without having to pay a mortgage you will also have a better cash flow if it is a rental property. If your rental property is part of your retirement plan, you may want to calculate at what time it would be most beneficial to you to not have a mortgage and plan accordingly. For anyone that may have an adjustable rate mortgage, it may be helpful to pay down the principal in anticipation of a future rate increase.
There really isn’t much of a tax advantage to paying your mortgage down faster. The only portion of your payment that is deductible is the interest. The more you pay towards the principal and the more cash flow you have, the more you will pay in taxes. Also, if you are currently relying on cash flow now, you will need that money on hand to live off of. Instead of ramping up your pay down efforts, you could always do an interest-only mortgage. This style of mortgage will reduce your monthly payment significantly, but also is just that, only interest payments and nothing towards principal. This option can potentially be good if you purchased when the market was good and is on the up. However, the risk here is if market conditions soften then it could cause more of a financial hardship.
Do you have questions on what you think you should do? Contact me today and I will provide you with information on the current state of the market to help you decide.