Your mortgage: To pay off or not to pay off?

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Paying off debt, such as your mortgage, can seem like it should be a top financial priority. After all, sending thousands of dollars to the lender each month can become burdensome and pointless. Best to be rid of that payment as soon as possible, right?

Not so fast, say many financial experts. While paying off your mortgage can be satisfying and should be a priority for some people, for others there are things that should be taken care of first. Here is a short list.

1. An emergency fund. In case of unforeseen major expenses, such as a home or car repair, having an emergency fund will give you a financial cushion to land on. Without this stash, you might be forced to take out an expensive personal loan or second mortgage.

Many advisors recommend having at least three to six months of income in a liquid account that is easy to get to. Some online banks pay higher interest than your local institutions, while still providing liquidity.

2. Retirement savings. With more immediate expenses, it’s easy to overlook saving for retirement. But you should definitely not put this off. In fact, depending on your situation, this might be your second priority. Particularly if your employer offers matching contributions to your 401(k), you’d be wise to take advantage of that.

Allowing your retirement savings to grow tax-free or tax-deferred over several decades can dramatically increase the size of your nest egg. Some advisors even recommend “paying yourself first”, in other words, having an amount automatically deducted from your paycheck and sent to your retirement account.

3. Paying off high interest loans and credit card debt. If you have high-interest-rate loans, you should pay those off as early as you can, even before saving for retirement or paying your mortgage. If your loan is at 16 percent interest, for example, and the return on your retirement savings is 7 percent, you’re losing 9 percent each year.

Likewise, if you’ve taken out or refinanced your mortgage in the last few years, it’s likely to be 7 percent or below. Take care of the higher interest rate expenses first.

4. Education loans. If you have education loans, for either yourself or your children, you should make a priority to paying those off. The reason is that education loans do not expire, and you don’t want to be saddled with debt while you’re living on your retirement income.

Most experts also advise against putting off retirement savings in order to finance children’s education. Students have a wide range of finance options, such as grants, loans, and work-study programs, whereas those options aren’t available to help finance your retirement.

5. Mortgage. Once you’ve decided to start paying off your mortgage, the best way is to make payments toward principal as early as possible to lower the overall cost of the mortgage. You could add an extra amount to your monthly payment, or make an extra payment and have that applied toward principal.

Another way is to refinance to a shorter term, such as moving from a 30-year mortgage to a 15- or even 10-year loan. While your monthly payments will be higher, you’ll be making them for a shorter time and the total cost will be lower.

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