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In our column #DearBernadetteJoy, personal finance and debt-free living expert and coach Bernadette Joy answers all of your money and debt questions. Today, she tackles a big one that so many striving to become debt-free have: Should I pay off my mortgage while I’m in debt?
As someone who just became completely debt free, paying off your mortgage is awesome. Because of that, I thought my answer to this question would be straightforward: to not pay off your mortgage until you’ve paid off your other debt. And that would be it, I’d have one really, really, short article. Then I asked myself, would there ever be a case where the answer wouldn’t be quite so clear cut? So, I thought about all the angles not just financially, but personally. It’s important to acknowledge that everyone’s situation is different and what applies to me might not apply to your life. So instead, here are five questions to ask yourself if you are wondering if paying off your mortgage while in debt makes sense.
Hold up. Can I afford this home in the first place?
First off, evaluate whether you should keep this home. I’ve seen too many clients buy houses that they couldn’t afford, and then being a homeowner becomes more of a burden than a blessing. A rule I follow (as does Forbes) is that your monthly home cost should be no more than 28% of your monthly income. Don’t rely on a lender to tell you what you really can afford, because all they care about is the mortgage. Add in things like utilities, maintenance, repairs and fun stuff (like the cute stuff on HGTV you want to buy) into your monthly budget. If that amount is more than 28% of your income, then the bad news — you’re in a house you can’t afford without some struggle, especially if you’ve got other debt. Forget about paying off the mortgage and figure out a way to make more or save more money to make your monthly house expense 28% of your income. Or a tougher pill to swallow, but I’m here to give you tough love: start looking for a new (less expensive) place to live.
Really though, how long will I be here?
Now, assuming you did buy a home within your means, if you’re planning to stay in the house long-term (more than 10 years), then it would make sense to overpay on your mortgage, if you can afford it. Similarly, if you are closer to retirement age, a debt-free home might be more valuable than if you are in an earlier stage of life. I know a family whose greatest goal in life was to have their children inherit the home they raised them in, so their grandkids could be raised there, too. For them, nothing meant more than paying off that house. But if this home is just a pit stop on the way to your forever home, you may want to use your cash elsewhere, again to pay off any other debt, if you have any.
What other debt do I have?
In general, if you have any other form of consumer debt like credit cards, student loans or car payments, I would pay those off first. When I was $300,000 in debt, the total consisted of student loans, a mortgage on a rental property (in the days I thought I would be a house flipper), and the mortgage on my primary residence. Most other debts don’t benefit you to keep longer because they only cost more as they gain interest, and they take away from your net worth. This was the case with my student loans that were accruing interest daily (yikes), and therefore becoming more expensive the longer I held them.
The beauty of a mortgage is the interest isn’t accruing as you hold the debt (it’s already built into your payments). And as you pay off your mortgage, you at least retain the amount that you pay in principal. Once I paid off my student loans and started tackling my mortgage, it was a lot less painful because I saw the amount of equity (and therefore my net worth) going up with every payment I made. If I had paid my mortgage first or at the same time, my student loans would have only gotten bigger.
Am I in danger of future debt?
Now, while having a paid off house is wonderful, it also means that a lot of my wealth is tied up and isn’t easily cashed out. So, if you have any large necessary upcoming expenses that you anticipate leading to debt, reconsider paying off the house until you have the cash covered for emergencies and your other needs. A great example is medical expenses. If you have a chronic condition or perhaps anticipate having a surgery in the near future, I’d rather you pay for that in cash than put the money towards your mortgage. First off, what does it matter if you have a paid off house if you’re not healthy enough to enjoy it? Two, medical debt sucks. And three, medical debt collectors suck even more. Now, is a vacation or a fancy new car a necessary expense? You can be the judge of that for your own circumstances, but you can probably guess what my answer to that is.
And lastly, will this give me peace of mind?
When I was aggressively paying off my home (after paying off all my other debts), someone on Instagram commented, “Why would you pay off your house if you can get a better rate of return on investing it elsewhere?” And I’m sure a lot of people have thought the same thing. My response was simple, “Because knowing the bank can take away my house is what keeps me up at night.” Personal finance is just that, it’s personal. Paying off debt is not just about the money, it’s about reducing risk and enjoying your life. So, even though I chose to pay all my debts first and then pay off the house, if your biggest worry in life is losing your house, then you do you, boo boo! As long as you are happy with your choices, no one can judge.
Bernadette Joy is an entrepreneur and personal finance enthusiast based in Charlotte, North Carolina. She is currently enjoying #debtfreelife after she and her husband paid off $300,000 of debt (including their home) in three years. Hashtag your personal finance questions with #DearBernadetteJoy or email them to firstname.lastname@example.org. Follow Bernadette Joy at @crushthisdebt on social media for advice on how to crush your money goals and still love your life.
Feature Image: Debbie Weidrick For The Money Manual
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