Paying Off a Mortgage Early: Is it a good idea?

By Carol Church

A mortgage is typically the largest debt most of us ever have, and for some, the desire to “get rid of” this big obligation can be intense! As the end of the term approaches, or even well before, some homeowners may begin to consider paying off their mortgages early.

But does it really make financial sense to pay off this debt before the term is up? A lot will depend on your age, financial situation, and personal money goals. However, a few pros and cons regarding this idea follow.

Reasons Not to Pay Off a Mortgage Off Early:

You have other unsecured debt, like a car note or credit card bills.

As most people likely already know, mortgage debt is typically considered “good” debt, while many other types of debt, such as a car loan or credit card bills, are not. Homeowners shouldn’t even consider paying off a mortgage early if there are financial obligations like these in play.

You benefit significantly from the mortgage interest tax deduction.

The mortgage interest deduction may be the most frequently cited reason not to pay off a house early. For those who purchased costly homes and who are in high tax brackets, this deduction can be very significant—well worth the cost of holding onto the payments. (However, for other homeowners whose loans are smaller and whose tax obligations are less, the deduction may be far less valuable—or even nonexistent.)

A photo of an outstretched hand holding a key ring with a green key chain and gold keys attached.

You don’t have much cash, and may need to be liquid.

Owning your home may feel great on one level, because that big monthly bill is gone. On the other hand, typically, homeowners who pay off their own homes have sunk much of their net worth into the house and now have much less liquidity. If a big cost comes up (and who can guarantee for sure that it won’t?) there may be no easy way to access a large sum of money….at least, not without selling the house, which likely is (and should be) at the bottom of the list.

You aren’t maxing out your retirement plans.

In almost all situations, experts say, it’s a better bet to max out tax-advantaged retirement accounts (like  IRAs, 401Ks, or in the case of the military, TSP accounts) before paying off a home. And don’t even think about turning down employer matching funds in favor of getting rid of the mortgage!

You might be moving.

Experts agree that there is little to no point to paying off a house early if moving may be in the plan. If this isn’t your forever home, just don’t bother.

Reasons to Consider Paying Off a Mortgage Early:

You’re close to retirement.

If you’re approaching retirement and still staring down a mortgage, it might be time to think a little more about the situation. Retirees living on a fixed and limited income may benefit significantly from knocking out that monthly payment, especially since investing heavily in the market may not make as much sense at this age.

You have a high interest rate on your mortgage.

In truth, a whole lot should depend on how much interest you’re paying your loan. If the rate is relatively high, then you might well be better off paying it off. If it’s quite low, then the mortgage really does fall into the category of “good debt” and isn’t worth the opportunity cost you incur by paying it off. Take that extra money you apparently have lying around and invest it instead.

You really hate debt.

While this really isn’t a financial reason to make this decision, for some, it’s emotionally compelling. You may just enjoy your life more with the knowledge that the house is fully paid off.

You’re not going to save otherwise.

Financial experts do mention that if someone doesn’t seem to be capable of saving or putting money away in any other fashion, making one big push to pay off the house can be a “safe” way to ensure a degree of financial security. However, this situation isn’t all that common.

You want to leave your house to someone who needs it.

If you’re hoping to leave your house as an inheritance to someone who might lack the means to pay the mortgage, or simply want to make the inheritance simple, making sure it’s all paid off as soon as you can manage is probably the best choice.

The question of whether or not to pay off a mortgage before the term is actually up is a “good problem to have.” It means that a homeowner has amassed enough wealth and financial security to be able to consider making a lump sum payment that is out of the reach of many. However, before being overly tempted by the idea of no longer having a payment, anyone considering this option should think carefully. While it might be the right choice, there are many good reasons why it might not be.

References:

Backman, M. (2016). 3 Reasons Not to Pay Off Your Mortgage. Retrieved from  https://www.fool.com/investing/general/2016/01/03/3-reasons-not-to-pay-off-your-mortgage.aspx

Charles Schwab. (2017). Should You Pay Off Your Mortgage Early, Before You Retire? Retrieved from  http://www.schwab.com/insights/personal-finance/should-you-pay-off-your-mortgage-early-before-you-retire

Nason, D. (2015). Should you pay off your mortgage early? Maybe not. Retrieved from http://www.cnbc.com/2015/07/13/should-you-pay-off-your-mortgage-early-maybe-not.html

Phipps, J. (2017). Keep the mortgage or pay off the house?Retrieved from  http://www.bankrate.com/retirement/keep-the-mortgage-or-pay-off-the-house/

Russell, R. (2014). Should You Pay Off Your Mortgage? Retrieved from https://www.forbes.com/sites/robrussell/2014/07/10/should-you-payoff-your-mortgage/2

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