To Refi or Not Refi, That is the Question

To pay off the mortgage early or not? That is the question!

Record low interest rates spawn lots of refinancing activity. Frequently borrowers want to look at paying down their mortgage balance or quickly paying off their mortgage utilizing a short term program as part of their refinance strategy.

On the other side of the argument there are many reasons not to pay down or pay off your mortgage. Ideally everyone would one day be in a position to pay off their mortgage, but should consider only paying it off if there is a real reason to do so. Why?

The combination of record low rates and the mortgage interest tax deduction means that your actual rate today will be lower than what you can earn on conservative investments. As rates rise the interest you can earn will continue to grow but your mortgage rate will remain low.

We often hear borrowers say, "I want to pay my mortgage off before my kids start college so that I can get a home equity loan in order to pay for college."

So they want to pay off one debt so that they can borrow more later on? If you consider interest rates-today they are low, but by the time the little one is off to college that rate on the equity line could be 7% or 8%. That's when you will wish you had a low 30-year fixed rate combined with a good college savings plan!

When making mortgage payments you are paying interest, when saving money you are earning interest. How about instead of making extra payments towards your mortgage in order to pay it off you simply save that same money in a college fund.

If you pay off your mortgage and your house value declines you lose money. If the value of your house goes up you make money, but you make the same amount if you have a mortgage or not. If the cash is in the bank and the value drops you have not lost your cash, only equity.

Cash is king—and many people do not have enough saved to keep them going in tough times. Before paying off your mortgage debt, pay off all other debt, have six months of monthly expenses saved and accessible for an emergency fund, make sure that you have property planned for future needs such as college and retirement.

Today we are seeing many people pay down their mortgage in order to create better financing options, such as removing the cost of private mortgage insurance, reducing the loan to value ratio in order to get a better rate or program. These are all good reasons to consider reducing your mortgage debt if you are in a position to do so.

There is no absolute right or wrong way of structuring your mortgage in a purchase or refinance transaction, but it is important that borrowers are educated as to all options and to the benefits and disadvantages of each choice.