- Paying off your mortgage early is a good way to free up monthly cashflow and pay less in interest.
- But you’ll lose your mortgage interest tax deduction, and you’d probably earn more by investing instead.
- Before making your decision, consider how you would use the extra money each month.
Paying off your mortgage early can be a wise financial move. You’ll have more cash to play with each month once you’re no longer making payments, and you’ll save money in interest.
Making extra mortgage payments isn’t for everyone, though. You may be better off focusing on other debt or investing the money instead. Here are the pros and cons to paying off your mortgage early.
The pros of paying off your mortgage early
- Save money on interest. Each month that you make a mortgage payment, some money is going toward interest — so the fewer payments you have, the less you will pay in interest. Paying off your mortgage early could save you tens of thousands of dollars. (Just make sure to clarify with your lender that all extra payments will just be going toward your principal, not interest.)
- No more monthly payments. By eliminating monthly mortgage payments, you free up that cashflow to put toward other things. For example, you could invest the extra money or pay for your child’s college tuition.
- You own the home outright. If you hit a financial rough patch, there’s the possibility that you won’t be able to afford monthly mortgage payments. Your house could be foreclosed upon if you default on payments. When you completely own the home, there’s no chance of losing the house.
- Peace of mind. You may simply like the idea of not having a mortgage hanging over your head. The freedom that no mortgage payments gives you is a powerful motivator.
The cons of paying off your mortgage early
- Earn more by investing. The average mortgage interest rate right now is around 3%. The average stock market return over 10 years is about 9%. So if you pay your mortgage off 10 years early vs. invest in the stock market for 10 years, you’ll most likely come out on top by investing the money instead.
- Mortgage prepayment penalties. A mortgage prepayment penalty is a fee you pay the lender if you sell, refinance, or pay off your mortgage within a certain amount of time of closing on your initial mortgage — usually three to five years. Not all lenders charge this fee, and you probably don’t need to worry about it if you’re waiting more than five years to pay off your mortgage. But you should always ask your lender first.
- Lose the mortgage interest tax deduction. As a homeowner, you can claim the amount you pay in mortgage interest on your taxes to lower your taxable income. You’ll lose this perk by paying off your mortgage early.
- Hurt your credit score. Several factors make up your credit score, and one is your mix of credit types. For example, maybe you have a credit card, car loan, and mortgage. By taking away one type of credit, your credit score will decrease. This should be a fairly small drop, but it’s something to consider.
Questions to ask yourself before paying off your mortgage early
How would you use the money you’d be saving on monthly payments?
If you’re paying off your mortgage early so you can have more monthly cashflow, you should have an idea of how you’ll use that extra money. If you want to cut out your $900 mortgage payment and invest $900 per month in its place, that could be a good use of the money.
Ultimately, it’s up to you how to spend the extra cash. But if you can’t think of what you want to do with the money, or if you’d spend it on frivolous purchases, paying off your mortgage early might not be the best financial move.
How does paying off your mortgage early fit into your retirement plan?
The answer to this question will be different for everyone.
If you know you want to stay in this house during retirement, paying it off now so you don’t have to make monthly payments in retirement might be the right move.
But if you’re, say, 10 years away from retirement and haven’t started investing yet, investing will be a better use of the money than paying off the mortgage early.
Do you have other debts to pay off?
The general rule of thumb is that you should focus on paying off higher-interest debt before lower-interest debt. You may be paying a higher rate on a credit card or private student loan than on your mortgage, so you’d benefit more by paying those off early.
Don’t pay so much toward your higher-interest debt that you risk defaulting on mortgage payments, though. Yes, credit cards can be expensive, and the issuer may take legal action if you default on card payments. But defaulting on mortgage payments can be an even bigger risk, because you could lose your home.
There’s no clear right or wrong answer about whether or not you should pay off your mortgage early. It depends on your situation and your personal goals.
About the author
Laura Grace Tarpley is an editor at Personal Finance Insider, covering mortgages, refinancing, and lending. She is also a Certified Educator in Personal Finance (CEPF). Over her five years of covering personal finance, she has written extensively about ways to navigate loans.
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