When we came across Yahoo Finance contributor
Adam Hatter’s story about his family’s five-year triumph over their mortgage debt, we couldn’t help but wince.On the one hand, Hatter and his wife’s success is something to marvel at. They borrowed$157,000 with a 30-year fixed-rate loan in 2008 and managed to pay it off 25 years early on a “quite average” dual income.
“The sooner it was paid for, the sooner we would be free from the shackles of debt,” wrote Hatter, a government analyst who lives in Charleston, W. Va. “The sooner we would have the ability to use our money for more than just monthly bills.”
But the reality is that there are likely few homeowners out there who would benefit from paying down a mortgage debt that quickly.
“People today are woefully under-saved for both emergencies and retirement,” Greg McBride, mortgage expert for Bankrate.com, told Business Insider. “They need to be maximizing their financial responsibility by padding their emergency savings, utilising tax-favoured retirement options and not pouring every spare nickle into their home, which is an illiquid asset.”
And what is truly troubling is the extreme measures the Hatter family took to do it.
They decided to double up on their mortgage payments each month. That meant eliminating wasteful spending, maximizing their incomes, and sticking to a tight budget. But it seems like they threw the baby out with the bathwater.
Hatter and his wife decided to forfeit their retirement savings in the process, except for their 5% employer contribution. And when they realised how much they’d need to sacrifice to double up on mortgage payments each month, they also stopped contributing to 529 college savings plans for their two young children.
There’s no telling how much that money would have grown over half a decade, but one thing is for certain: There’s no way to get it back now.
“That extra money applied to the mortgage is effectively gone until they sell the house and whether you’re selling or staying there, it’s not a free house once you get the loan paid off,” McBride said. “You still have property taxes, maintenance and upkeep, not to mention you’ve really compromised your financial security in the meantime.”
The Hatter family aside, in what case would it be wise to pay off a mortgage early? Ideally, you’d meet these criteria, according to McBride:
- You are able to continuously max out your 401(k) or IRA contributions.
- You have at least six to 12 months of emergency savings.
- You have no other high-cost form of debt (student loans or credit debt, for example).
- You have contributed to your children’s future education costs.
At the end of the day, each case is different, and every family should strategize carefully for paying off any debt as large as a home loan.
“Look, it’s not like they took out all that equity and went and spent the money … but it’s certainly not their optimal move,” McBride said.
“It may be 10, 20, 30 years for them to realise that, when their kids go to college and they haven’t accumulated enough savings and they have to take out student loans. And yeah, they don’t have a mortgage, but they sure won’t have as much saved in retirement as they would have liked.”
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