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Consider Alternatives Before Paying Off Your Mortgage

For many, the American Dream means owning a home free and clear -- that is, without any mortgage payment. However, for some this means paying off the mortgage and ending up in a ‘no cash’ position. For others it means trading in one debt for another, perhaps on a credit card – at a substantial cost.

I often recommend that homeowners consider keeping their mortgages for two primary reasons: liquidity and the tax advantage.

If you’re like most people, you simply can’t afford to buy everything with cash. Therefore, you should consider how to best use the credit you have. For homeowners that often means borrowing against the equity in the home since the interest will be tax deductible.

When a customer asks me if it would be appropriate for them to pay off their mortgage, I normally let them know that it will leave them vulnerable to real estate market swings, making it more difficult to get money out of the real estate than it would be to get it out of a qualified investment plan.

A primer on the subprime situation

For those unfamiliar with the term, "sub-prime home loan" refers to mortgages given to individuals with significant credit issues, or those otherwise unable to qualify for a standard, conventional loan. Due to the fact that these loans tend to be risky for the lender, they generally bear higher interest rates or adjustable rates and often carry steep pre¬payment penalties. Sub-prime loans have actually been around for years — so why all the drama now?

Many subprime and other adjustable home loan rates have moved dramatically higher, due in part to the Federal Reserve Board's recent rate-hike cycle. So as these rates are adjusting higher — and the payment right along with it — homeowners are finding that they are unable to keep up with the dramatic increase in their monthly payment.