Pitfalls of Paying Off Your Mortgage Early

• Other investments you may have. Depending on your cash flow, your financial plan and your ability to put money into it, paying off your mortgage may carry high opportunity costs –investment returns you'd have to forgo that might be higher than the interest rate on your mortgage.

• Your cash reserves. You should have enough cash to pay living expenses for six months squirreled away in the event of emergency – such as losing your job. If you don't have this, you shouldn't be thinking about paying off your mortgage.

• The interest rate on your mortgage loan. If this is a low rate – as most mortgages are currently after years of historically low rates – then you may not gain much by paying off your mortgage. While you're at it, you should evaluate this rate against the current lending market to see how much better you might do by refinancing your mortgage. Would this move produce a lower rate? If so, you might be able to lower your payment and invest more for retirement. This option might have helped the before mentioned couple.

• Property taxes on your home. Often, these taxes are included in the mortgage payments. (If not, you're probably acutely aware of this figure). If so, you want to determine this figure and account for it as a cost in your post-mortgage financial life. This figure tends to suppress the giddiness some feel when paying off their mortgage.

• Where you stand in the life of the loan. The more principal that's outstanding, the more interest you're paying. But the interest can usually be deducted for federal tax purposes. Have a look at your most recent tax return to estimate how much you're saving from this deduction. Again, this might make mortgage payments less painful and the thrill of outright ownership less alluring.

These factors represent the practical side of the decision of whether to pay off your mortgage. And while you should pay close attention to them, it's not imprudent to consider the impractical side of things – the satisfaction that paying it off might bring – assuming you're in good shape regarding the points above and that the payoff doesn't effectively cost you too much.

I once had a client nearing retirement with a $30,000 certificate of deposit maturing and $28,000 left on his mortgage. His retirement was fully funded, he had good cash reserves and had he always lived well within his means.

He came to me before making the decision and all but dared me to show him why it didn't make sense to pay off his mortgage. I could see that the psychological value of owning his home entirely was worth a lot to him. Since he had met all of his financial goals, I told him that, if it would give him satisfaction, then by all means go ahead and pay the darned thing off. Now he proudly displays his deed, framed and hanging on the wall.

This column is the opinion of the author and in no way reflects the opinion of ABC News.

Byron L. Studdard, a CERTIFIED FINANCIAL PLANNER™ practitioner, is founder and president of Studdard Financial, LLC, a financial advisory firm in Sarasota, Fla., dedicated to helping clients build wealth, protect it and pass it on to future generations. Studdard is listed in the Guide to America's Best Financial Planners (published by the Consumers' Research Council of America, an independent research organization). He can be reached at Byron@studdardfinancial.com. If you have a question for him, send him an email and he will try to answer it in an upcoming column.

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