4 Questions to Ask Yourself:
First question:What are your current monthly expenses, what is your current monthly mortgage payment (principle and interest only), how much excess cash flow do you have each month, and how much of that excess cash flow do you currently save?
The key here is to determine if you, the homeowner, really understands their cash flow situation. You need to make sure you know where your cash is going today and where it is going tomorrow.
Second question:What's your current loan balance relative to your total taxable investments?
The key here is to determine what sort ofliquidsituation you will be left in after paying off the mortgage. The more liquid the situation, the more likely it is that you should go ahead and pay off the mortgage as the impact will be minimized. (For more, see:Calculating the Mortgage Interest Tax Deduction.)
If you are about to reduce your liquidity via an early payoff of the mortgage, you should make sure that you have relatively easy access to some portion of the home's value. If the you have not taken this basic step, you likely are not ready to move forward with paying off the mortgage.
Fourth question:What is yourtax rate, your current mortgage interest rate, and the expectedrate of returnon your investment portfolio?
This is where a lot of people jump immediately. You've heard it many times: "I can't see paying off my house when I've got a 4% mortgage, which is really more like 3% after tax, and I know the market is going to return me 8%." The reason to hold the mortgage is exactly because of the opportunity to do something better (e.g. invest) with the funds. Fully understanding these three rates is critical to making this decision to pay off or retain the mortgage. (For more, see:Paying Down Debt Early.)
The first four questions are designed to flush out the key facts and data related to the homeowner's situation. However, there is really a hidden agenda to these questions. They are designed to make sure that the you understand the complexity of the question and that the homeowner has thoroughly thought through the impact of paying off the mortgage. (For more, see:Should Retirees Pay Off Their Mortgage?)
These four questions set the stage for the final question: Would you sleep better tonight if you paid off the mortgage or would you sleep better keeping all of your funds invested?
That's right, the answer to the question comes down to what would make the homeowner more comfortable. Mathematically there is almost always a right answer to the problem. In fact, given today's crazy low mortgage rates, not paying off the mortgage is likely the best long-term decision. However, not paying off the mortgage will introduce a higher level of variation in the homeowner's net worth. And higher variation is directly tied to higher risk. Individuals have different risk profiles and this needs to be factored in to this decision.
The answer on whether or not to pay off your mortgage comes down to whether or not you wouldsleep betterwith or without it. Click the image for more info