A Look At The Pros and Cons of Paying Off Your Mortgage Early

Should I pay off my mortgage early?

Living mortgage-free is a goal many of us have. However, as great as it sounds to free up thousands of dollars each month, paying off your mortgage early is not always the most financially savvy move. Let’s discuss some of the pros and cons of paying off your mortgage early.

Key takeaways

1. Paying off your mortgage comes with peace of mind and additional financial security, but there are disadvantages.
2. Paying off higher-interest debt like credit cards and auto loans should always take priority over paying off a mortgage.
3. Because of the nature of compound interest, it might not make sense to pay off a mortgage first and then start saving for retirement. You may want to do both at the same time.

What are the benefits of paying off my mortgage?

The most significant benefit of paying off your mortgage early is the peace of mind that comes from not worrying about having to make a mortgage payment. You won’t have to worry about potentially losing your home if you lost your job or had health troubles. So if that’s you – by all means, pay off your mortgage! For many, that feeling of freedom outweighs any of the cons.

Another benefit is that you’ll be able to use that extra cash each month on whatever you’d like. It would be best to invest that extra money into something like another piece of real estate with a positive cash flow. However, many people who pay off their mortgage early use that extra cash to cover living expenses without touching their retirement or savings accounts, which is not a bad idea.  

Are there disadvantages to paying off mortgage early?

Believe it or not, there are some reasons why you shouldn’t pay off your mortgage. One of those reasons is that you will lose the mortgage interest tax deduction that homeowners can claim each year.

This tax break is one of the biggest perks of homeownership and can save homeowners thousands of dollars. Homeowners can lower their taxable income by the amount they pay in mortgage interest. In some cases, this tax break can bring a family into a lower tax bracket, resulting in huge savings.

Another disadvantage to paying off your mortgage early is that you’ll have to remember to set aside money for your property taxes and homeowners insurance. Sadly, those expenses do not go away once your mortgage is paid off. What’s worse is that these expenses were probably built into your monthly mortgage payment and held in an escrow account.

When taxes and insurance came due, they would automatically be paid out of that escrow account without you having to do anything extra. Without this escrow account, you will have to pay attention to when these fees are due. Taxes are paid twice a year, and depending on where you live, taxes can be huge chunks of change.

You’ll need to be diligent in setting aside money each month, so you’ll be able to cover them or else risk huge tax penalties as well as the potential to have a lien put on your house for nonpayment of taxes.

Lastly, another disadvantage to paying off your mortgage is that all of that money will be tied up in a non-liquid asset. That means that the cash is not easy to access if you get into a situation where you need it in a hurry. You would have to either borrow equity through a home equity line of credit (HELOC) or sell your home to access the equity, which could take months depending on the real estate market. Something else to consider is that the real estate market is cyclical. 

So, just because values are sky-high right now, they could come back down, and you won’t get the return you could have if you invested your money elsewhere.

When should I consider paying off my mortgage?

A homeowner should consider paying off a mortgage once they are free of all other debts and have started saving for retirement. Paying down high-interest debt should always be your first priority. This means that you should be free of any student loan, auto loan, or credit card debt before considering paying extra toward your mortgage. This is especially true if you took out a mortgage prior to the recent spike in interest rates, when interest rates were near record lows.

Saving for retirement should also be a priority. While many homeowners have a plan to pay off their mortgage first and then use the extra cash to save for retirement, that may not be the best plan. Your best friend with retirement savings is time. The longer you have, the more compound interest you’ll accrue, which is where the huge growth can come into play. 

If you are at a point where you are maxing out your annual savings contribution, which will be increased to $22,500 in 2023, then you can start contributing more money to your mortgage account.

By what age should my mortgage be paid off?

Some experts say you should be entirely debt-free, including your mortgage, by the age of 45, but others disagree. Plus, as housing and life, in general, continue to get more expensive, that may be an unrealistic goal. Other experts argue that instead of paying off your mortgage, you should take the extra money you would contribute to your mortgage and invest it elsewhere. 

For those of you who have low interest rates, the amount of money you’d be saving in interest by paying off your mortgage early would be less than the amount you could potentially make by investing in the stock market during that same time period. However, most experts agree that your mortgage should be paid off once you retire.

Bottom line

How you spend your money is a personal choice, and you need to do what’s best for you. Before committing to paying off your mortgage, you should determine your short-term and long-term goals to decide how your extra cash makes the most impact.

If you’re young, have a mortgage with a low interest rate, and no other debt, it makes the most sense to invest elsewhere to see significant returns you can enjoy later in life. Or, maybe you just want to rid yourself of the stress that comes with paying for your house. That’s fine too – at the end of the day, your health and happiness are what is most important.