Why paying off your mortgage slowly can be a good thing

Andrea Duchon
Yahoo! Homes
Why paying off your mortgage slowly can be a good thing
Photo: Thinkstock

Congrats! You've signed the paperwork, dotted the i's, crossed the t's, and purchased a home. You're also now the proud owner of a 30-year mortgage that's burning a big hole in your pocketbook. Better start throwing money at the mortgage to pay it off as quickly as possible, right?

Maybe not, says Paula Pant, founder of money management website AffordAnything.com.

In fact, "putting your money to its highest and best use might involve making only your minimum mortgage payment so you can invest the rest in higher-yielding opportunities," she says.

Read on to learn more about this, and other reasons why you might want to put the brakes on paying off that mortgage too fast.

You could see a better ROI by investing your money elsewhere

Before you decide to put all of your cash flow towards your mortgage, you should first see if you can get a higher return on investment, or ROI, elsewhere.

Pant gives one good example: Let's assume stocks will return about 7 percent in the next few decades. If you can borrow to buy a home at an interest rate of 4 percent, and put any extra money you were thinking of using to pay off your mortgage into the stock market instead, it would be a wise investment.

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"Over the long haul, you'll end up pocketing the spread of 3 percent," she says.

But although this might sound great, you also need to consider the risk, says Mitchell D. Weiss, a member of the board of the University of Hartford's Barney School of Business.

He urges you to take a hard look at if you can invest reliably and safely before you take the jump - since the stock market could be risky. This is so you can help guarantee your ROI, and not plunge yourself further into unnecessary debt instead.

To pay off higher-interest loans that will cost you more money

If you have a higher-interest loan or a maxed-out credit card that's eating into your wallet, it may make more sense to focus on paying that down versus putting all of your resources into your lower-interest mortgage payment.

"If you have two or more loans, you'll save the most money by paying down the highest-interest debt first. Credit card debt will always have a higher APR than a home loan, plus the interest isn't tax-deductible. Always pay that off first," advises Pant.

For example, say you have $10,000 in credit card debt and your APR is 15 percent. You'll be paying $1,500 per year in just interest - assuming that you're not paying down the balance at all. So if your mortgage interest rate is lower (which it likely is), it's best to pay down any higher-interest debt first. 

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To put extra cash in your 401K and gain additional benefits

Many employers match 401K contributions up to a certain percentage. If you're lucky enough to have this benefit, Pant recommends investing any extra cash you may have into your 401K - instead of investing it into your mortgage.

"If your employer matches your 401K contribution, you're getting a guaranteed return on every dollar you invest," she says. "It's the only guaranteed return in the world of investing. You'd be crazy to pass that up."

To give an example, let's say you earn $50,000 per year and your employer offers a 2 percent match. When you put $1,000 - or 2 percent of your salary - into your 401K each year, your employer will also deposit $1,000 during the same period.

"Plus, 401K payroll deductions aren't taxed and neither is the income you earn in your 401K plan until you begin to withdraw it after you turn 59 and half years old," says Weiss.