Cons of early mortgage payoff
Does peace of mind justify losing tax, income benefits?
DEAR BENNY: I owe $13,000 on my home and would like to pay it off. My son thinks there is some legality that protects a homeowner when the bank still holds the mortgage. Is this correct? Any information would be greatly appreciated. –Carol
DEAR CAROL: I am not sure I understand your question. If you have a mortgage and owe money to a bank, the lender has the right to foreclose on your home if you become delinquent on your mortgage payment. The lender also has the right to sue you for a money judgment, based on the promissory note that you signed when you first obtained the loan.
As an aside, a Massachusetts court recently handed down an opinion stating that if the lender seeking to foreclose does not have the promissory note, the foreclosure cannot take place. As we all know from the mortgage problems facing this nation over the past several years, many lenders sold (hypothecated) their loans and no longer have the promissory note. This case is binding only in Massachusetts; but I suspect that many more courts throughout the country will follow up with the same decision.
Getting back to your situation, once you pay off the mortgage loan, the bank must release you from further obligations and record a release of the mortgage (deed of trust) on the land records in the county where your house is located.
So long as you are current with your monthly payments, you have nothing to fear from the lender.
But the real question: Why do you want to pay off the relatively small amount that you owe on your loan? I assume you can afford the monthly payment, especially if you have $13,000 available. Do you get (or need) tax deductions? While the interest you pay on a mortgage decreases yearly, there still will be some interest that you can deduct for tax purposes.
I know that readers will tell me, “I am only getting 0.1 percent interest on the money in my bank account so why not pay off a 4 or 5 percent loan?”
This is a personal matter that can only be answered by each borrower. However, after carefully analyzing all of the pros and cons, one “con” is that you do not want to be “house rich and cash poor.” Another “con” is that someday in the future, your bank will start paying you more interest.
So here’s a compromise: Instead of making the exact monthly payment required by the bank, why not add a couple of hundred dollars to the payment each and every month? Make sure that you advise your bank (on the check you send in or on the coupon the bank receives) that you are making an extra payment to be credited toward principal.
In my example, if you add $200 each month, that will reduce your balance each year by $2,400, and will pay off the $13,000 in a little over five years.