by Tenielle Shellman, Manager – Central Planning, Wealth Enhancement Group

A lot of people, concerned with racking up too much debt focus on paying off credit card and auto loan debt as well as their mortgage. While decreasing such high-interest, non-efficient credit card debt is a good idea; it may not always be in your best interest to strive for that “13th” mortgage payment.

Mortgage debt is considered “efficient” or “good” debt. This is because this debt has a tax-deduction on interest payments and was taken out on an asset that generally increases in value, especially if you end up staying in the home for a long period of time (these last few years notwithstanding). Having such debt is not a bad thing as long as you can afford the monthly payments.

However, there are several reasons for not putting that extra payment toward your mortgage principal each year. The biggest reason is that you give up access to that money in case you need it down the road. That extra payment could instead be put toward your cash reserves for potential future cash emergencies, thus eliminating a possibly higher-interest rate on monies you are borrowing because you did not have access to your own money. Or it could go toward other savings that have the potential of paying more interest than you would save by paying down the mortgage. The catch is, if you do end up using the money, you need to make a schedule for paying yourself back just as you would a bank – with the same interest – that way you can either continue to build your savings or have access to the money for additional cash needs in the future.

Another consideration is the amount of time you have until retirement. The younger you are the less sense it makes to hurry up your mortgage payments. In such a mobile population chances are you will not stay in your house long enough to make the interest savings worthwhile. Rather you could be putting that payment into an income-creating account and compounding the earnings on it over a long period of time to help fund your retirement savings goals. Moreover, if you use the money and then pay yourself back using the bank’s interest, your savings will continue to increase.

Lastly, if you are concerned with paying off the mortgage early, putting the money you would have put toward extra mortgage payments into a safe, interest-bearing account will help you do so. First, calculate the number of years of extra payments it would take to pay off your mortgage. Then calculate what that amount of extra money in another savings vehicle would bear. In the year you would have the mortgage paid you should have enough money in that savings to pay the mortgage in one lump sum, should you desire to do so. The only difference will be that in the meantime, instead of the bank, you would have had access to that money.