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When It Makes Sense to Pay Off Your Mortgage Early

Susan Johnston Taylor

In 2009, after paying off roughly $52,000 in debt, Jackie Beck and her husband decided to tackle their mortgage and pay it off early. "If you'd graphed our progress [on the mortgage] it would have looked like a hockey stick, starting out slowly and then shooting up toward the end," Beck says.

The couple didn't cut out all discretionary spending, though. "We built in some fun and some breaks so we could keep focus," Beck says. With the money they had saved, her husband bought the stereo system he wanted and she got to travel to Paris.

In August 2012, they made the final payment on their home in Arizona. Beck also created the Pay Off Debt app (compatible with iOS and Android) to share the strategies she used to organize their debts and track their progress.

[Read: Credit, Mortgages and Your Ability to Buy a Home: It Doesn't Have to Be Scary .]

Some financial experts might argue that in the current climate of relatively low mortgage rates, it's more efficient to take the mortgage interest tax deduction and invest extra money instead of putting it in mortgage principal. But Beck doesn't buy that argument. "That assumes you can only do one thing, and that's definitely not the case. We did both," she says.

Financial planners say choosing when to pay off your mortgage is rarely a clear-cut mathematical decision. For one thing, many people cite the mortgage interest tax deduction as an argument against early payoff. But as Cary Cates, certified financial planner at Cates Tax Advisory and an enrolled agent in Denton, Texas, points out, some people opt for the standard deduction rather than itemizing, so "the mortgage interest deduction may not be as valuable as many people think," he says. Also remember that while a tax credit reduces your tax liability dollar for dollar, a deduction simply reduces the amount of money you're taxed on.

Here's a look at the factors to consider before doubling down on an early mortgage payoff.

What other debts do I have? With the home as collateral, mortgages tend to carry lower interest rates than credit cards or student loans. For instance, paying off a mortgage carrying a rate of 4 percent while carrying a balance on credit cards at 20 percent wouldn't make sense, however tempting it might be to say your home is paid off. Financial advisors often stress that "the mortgage is going to be the last piece of the debt puzzle to get paid off once you get your student loans and car loans knocked out," says Tyler A. Gray, a certified financial planner in Tulsa, Oklahoma.

[See: 10 Long-Term Investing Strategies That Work.]

Am I also funding retirement savings? Beck points out that paying off your mortgage doesn't have to come at the expense of investing, but if resources are tight, it might make sense to emphasize retirement savings. For those with little or no retirement savings, Gray might steer them toward prioritizing retirement. "You can always downsize in retirement, but if you don't have enough to cover your basic living expenses outside of housing, it's going to be hard to survive off of anything other than cat food," he says.

Will not having a mortgage help me sleep better? For Beck and her husband, not having mortgage payments gave them tremendous peace of mind. Without a mortgage payment, "our bills are ridiculously low," she says. "[The bills are] so low that when my husband got laid off, I decided that was the perfect time to go into business for myself. It gives me so much freedom," Beck says, adding, "from a behavioral aspect, there's a whole lot more value than just the numbers will ever tell you."

Based on these considerations, if you decide to forge ahead with speeding up your mortgage payments, do so carefully. The Dodd-Frank Act banned prepayment penalties on most conventional mortgages, but if yours does have a penalty, it could be as much as 1 or 2 percent. Gray says to make sure yours doesn't have one.

Also make sure that your mortgage lender applies your extra payments to principal, because that helps you extinguish your mortgage sooner than making prepayments toward interest. "With most banks, there's a spot on the payment voucher [to check for principal or interest]," Gray says. "If your mortgage voucher doesn't have that, include a letter and make it very clear. Write in the memo section, 'Apply to principal only,'" he adds.

[See: 8 Financial Steps to Take After Paying Off a Debt.]

Even if the numbers point to using extra money in other ways, opting to pay off your mortgage early can pay emotional dividends. "I have never seen someone who is later upset that they paid down their mortgage sooner than they had to," Cates says. "It simply doesn't come into play because it gives people a huge sense of pride, ownership and accomplishment," he adds.

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