Home » Home Insurance » Pros and Cons to Paying Off Your Mortgage Early

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So you’ve got some extra money and have begun to wonder what every homeowner wonders about at some point: should I make an extra mortgage payment? Paying off your mortgage, like most financial decisions, can be a good decision or a bad decision, depending on your situation and what makes you worry-free.

 

The good

 

Increased cashflow

Once your mortgage is all paid off, you won’t have a mortgage payment anymore! It sounds so obvious, but imagine not having to pay your monthly mortgage payment anymore. Although you’d still have taxes and insurance, imagine what you could do with that extra money.

 

Guaranteed rate of return

With housing declining, the stock market bouncing all around, it’s nice to be able to get a safe, predictable rate of return on your money. When you pay your mortgage early, you’re getting a return equal to whatever your mortgage rate is. Got a mortgage at 6%? Paying it off early earns you a guaranteed rate of 6%, much better than you’d have done year-to-date in stocks, CDs, bonds, or many other financial vehicles.

 

Peace of mind

Having a fully paid-off house means that as long as you keep current on your property taxes, you don’t have to worry about a place to live. No one can foreclose on you. This security is worth a lot, especially as you are approaching retirement.

 

You can potentially save a LOT of money

One extra mortgage payment per year can save you thousands and thousands of dollars, because you then pay less interest. Since it’s interest on such a large amount of money, you’re saving tons.

 

The Bad

 

Your house is an illiquid investment

If you have hundreds of thousands of dollars tied up into your home and something happens, it might be very difficult to access that money quickly. Getting a new mortgage or HELOC could take months, and selling even longer. Not paying off that mortgage keeps your funds liquid for easy access.

 

You could earn more

If your mortgage rate is low, you are paying off low interest debt when you could potentially invest that money somewhere else. If your rate is high, you get a guaranteed rate of return that’s good. But if your mortgage rate is low, paying it off early guarantees you a low return on your money.

 

You lose a tax deduction

Paying mortgage interest isn’t as bad as you think, because the interest is tax-deductable. You’re still paying more than you’re saving, but it may cost you less than you think, and paying off your mortgage before other debts that are not tax-deductable isn’t a good idea.  You would have to test whether it was tax deductable based on tax calculators and estimators.

 

You might have better uses for that money

If you have credit card debt, it is almost certainly at a higher interest rate than your mortgage. Or perhaps there are other expenses you are saving for, like college tuition costs for your children. Putting your spare money into a 529 college savings plan is tax-deductable based on tax calculators and estimators, and likely a better way to invest your money than paying off the mortgage early, if you have both these expenses.

 

So, should you pay off that mortgage early? That’s a decision every family must make for themselves. Some may rest easier at night knowing they own their home free and clear, while others may want to take advantage of other investment opportunities with the cash that would have gone into paying off the mortgage. Hopefully an honest assessment of your own situation and desires, combined with the above thoughts, can help you decide whether or not paying off your mortgage is right for you.

Photo credit: House by James Thompson/flickr

A financial and career advisor, Jenny Masterson also contributes content to thebestcolleges.org, an informational site featuring the best colleges as well as specialty institutions such online Christian colleges

6 Comments

  1. Julie Hayes says:

    For me Its better to pay my mortgage early, because its more comfortable to wake up every morning not thinking of the money that will be paid for my mortgage.

  2. Hi Valentine,
    For me, having debts mean that they must be paid as soon as possible. I did not know the cons involved in paying mortgages early. I only knew that the only downside is that when something bad happens, you cannot get a new mortgage quickly. Goes to show I’m not that knowledgeable about mortgages. Glad to know them here. Thanks for sharing!

  3. Ray
    Twitter: http://www.bvf.com.au/
    says:

    Thanks for sharing the information regarding the topic, really very useful points you have discussed here. would like to commit that being a professional I was also not aware of all things. so, i have to search on internet to upgrade my knowledge.

  4. Prashant
    Twitter: http://www.creditcardsaustralia.com.au/
    says:

    The information you have given is very nice, and very useful. The points are also very well explain.
    Thanks for posting the informative blog post.

  5. Wonderful post as in i”m in the last year of my retirement paying mortgage before is something that makes lot of sense. Retirement life should be very easy and debt free and to make it debt free life you need to be planned for your retirement and get expert financial planner to make better retirement plan for you with respect to your needs.

  6. Mr.MakingUsmile
    Twitter: MrMakingUsmile
    says:

    Very good break down of the pro’s and con’s. I guess it just depends on your lifesyle. Thanks for making me smile!

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