The impulse to pay off your mortgage quickly is understandable. Interest rates are near historic lows, so it’s possible to replace a 30-year mortgage with a 15-year loan and still afford the payments. If you’ve already refinanced at a dirt-cheap rate, you can take those savings and pay down your principal faster.
But the allure is more emotional than financial. Mortgage debt provides great financial flexibility, and paying it down fast probably isn’t the best way to grow your nest egg.
‘‘Generally speaking, there’s no advantage,’’ says Greg McBride, senior financial analyst at Bankrate.com.
That’s because the interest on mortgages is low, it helps lower your taxes, and paying less every month gives you chance to reinvest the savings in more productive ways. Among the better options: paying down higher-interest credit cards or saving for retirement.
On 30-year mortgages, the average rate is 3.66 percent, close to the lowest level since the 1950s. But in reality you pay an even lower rate when factoring in tax breaks. The government lets borrowers deduct mortgage interest from their income. And if instead of using the extra cash to pay down your mortgage you put it in a tax-advantaged retirement fund like a 401(k), your taxes are reduced even further.
Jim Sharvin, a certified public accountant in Torrance, Calif., says if you are thinking of paying down the principal more quickly than necessary — by switching to a shorter-term loan or sending extra payments to the bank — consider doing the following first:
■ Pay down all high-interest debt, as on credit cards. It’s expensive debt and has no tax benefit.
■ Build a cash cushion to cover unexpected expenses or loss of income.
■ Bolster retirement savings by putting the maximum into a tax-sheltered plan such as a 401(k), 403(b), or IRA. This also cuts your taxes.
■ Fund a college savings program such as a 529 plan for your children. These programs shelter the money from state and local income taxes.
The next step is a matter of preference. You could take money borrowed at 3 percent and try to invest it to earn more than that. If you have time to ride market ups and downs, 3 percent should be easy to beat. But if you are just going to park money in money market funds or certificates of deposit that yield less than 3 percent, it makes sense to pay down mortgage debt.
It’s also good to pay down a mortgage if you lack discipline to reinvest extra money wisely. It’s a way to protect you from yourself.
But there are smarter ways than opting for a 15-year loan. The shorter term locks you into a higher payment that could become a burden. A 30-year loan gives you options. If find yourself with extra money, pay down the principal. But if you’re short, scale back to the regular payment.