San Diego property owners often question whether they should pay off their mortgages early, or not. Some are fortunate enough to cancel out their home loans altogether with a lump sum of cash, or at least pay down a sizable chunk of the principal. In other cases, it is just a question of applying more money towards the principal balance. There can appear to be many advantages to this for San Diego County homeowners, but it may be far more financially counterproductive and risky than most realize. Essentially, you need to make sure paying off your San Diego mortgage is the right move at the moment. Here are some points to consider:
The Perks of Paying Your Mortgage
Paying off a mortgage is appealing in more ways than one. Some long for what it may feel like to be out from under the burden of debt. Others are concerned that more mortgage loans on their credit reports can hurt them. In some cases, some San Diego, California homeowners might believe this is the best and most profitable use of their money. Then there are those that believe cancelling out their monthly mortgage payments will increase their amount of monthly disposable income.
Having acknowledged the benefits, why wouldn’t everyone strive to pay off their mortgage as soon as possible? Why are some very savvy individuals taking out new mortgages, even if they don’t need the cash?
Five Alternatives to Paying Off Your Mortgage
1. Your Mortgage Lender Would Rather You Keep Your Money in the Bank
While banks may not normally share an alignment of interests with consumers, this might be one factor to keep in mind. Talk to savvy and experienced bankers and they’ll tell you they’d often prefer to see a borrower with some cash reserves in the bank for emergencies. It doesn’t even have to be their bank. If you are strapped for cash, it can lead to a domino effect with very serious financial consequences. Now, if you just won the lottery and have a million in cash, and only need a couple hundred thousand to cancel your mortgage, this might be a little different. However, coming into just $30k, the money may be best placed elsewhere.
2. Refinance Your San Diego, CA Mortgage
For those worried about maintaining mortgage payments and paying interest, why not simply refinance your loan? Home loan interest rates are unlikely to go lower, or be this low again in most of our lifetimes. So, if you ever need to access or leverage equity, now is definitely the time to refinance. For those really concerned, there is the option of joining a credit union and potentially obtaining even lower rates while helping their own organization. Some may even find that they can better help others by using a private mortgage. While many may not approve of Ben Bernanke’s monetary moves at the helm of the Fed, most would assume he is pretty financially savvy with his own personal finances, and he has been seeking a refinance.
3. Change Your Perspective
The majority of property owners that are considering paying off their SoCal mortgages are motivated by one simple phrase: ‘free and clear.’ Sounds great, right? Well, what about property taxes, insurance, and often condo or HOA dues? What about maintenance? While it sounds great, the truth is that properties are very rarely really free and clear of financial obligation. So, if you pay off your mortgage with all the cash you have left, only to realize you forgot about these expenses ,you could be in for a disaster. Or you could incur the expense of taking out a new mortgage, reversing any pros of paying it off in the first place, and probably worse. This doesn’t mean you shouldn’t do it, but make sure you are aware of all the costs and cash flow needs before making a big move.
4. Find New Financing Structures to Free Up Credit and Liability
For those concerned about having multiple mortgages, or tying up their credit, there are other solutions.However, while it may not make sense to many, having no open credit lines can actually be bad for your credit score. Some may discover that they can buy properties under corporations or trusts, and obtain non-recourse loans which reduce personal liability, free up personal credit, and provide enhanced privacy at the same time. For those with multiple mortgages, consider rolling them into one loan, or a blanket mortgage from a commercial mortgage lender. This can free up personal credit, make managing bills easier, and may reduce overall borrowing costs.
5. Use Your Mortgage Interest Deduction
Among the tax benefits San Diego real estate has to offer, mortgage interest deduction (MID) is perhaps one of the most important. It could save many San Diego property owners thousands of dollars per year in taxes, and is one of the chief reasons that wealthy individuals take out mortgages, even when they don’t need them.
What to Do with the Money Instead?
Those that have other debts with higher rates may be better served paying them off. Car loans, for example, may have a higher rate than your mortgage. Get rid of the debt with high interest and work from there. However, without a doubt, the best investment move today is probably to invest that money in buying more real estate. This can be for flipping houses or acquiring cash flowing real estate.
