PROS AND CONS OF PAYING YOUR MORTGAGE OFF EARLY

Pros and Cons of Paying your Mortgage off Early

06 Jan, 2022

There’s something so satisfying about knowing you paid your mortgage off early, right? You’re living on easy street when you don’t have a $1,000 + a month payment to deal with, what could be better? 

Believe it or not, paying your mortgage off early isn’t for everyone. While it’s a great position to be in if you can do it, you must have the right circumstances to make it work for you.  

Here’s what you should know. 

Who Should Pay Their Mortgage off Early? 

Believe it or not, paying off your mortgage early isn’t for everyone. You have to be in a good financial situation to do so.  

Just because you have the money to pay your loan down faster doesn’t mean you’re a good fit for paying your mortgage off early. Before you spend the money on your mortgage, think about your other financial goals.  

Ask yourself the following. 

Do you have money saved for retirement? 

Saving for retirement may not be on your mind right now, but it will be here before you know it. If you don’t have money saved for it, and you pay your mortgage off early, you’ll tie the money up in your house, then what? 

Make sure you have enough money saved for retirement, or at least a nice nest egg started before you pay your mortgage off early. 

Do you have a lot of consumer debt? 

If you’re in over your head in debt, it doesn’t make sense to pay your mortgage off early. Consumer debt interest rates are much higher than any mortgage rate. Rather than focusing on paying your mortgage off early, get yourself out of debt as quickly as you can. You’ll save a lot more money by getting out of the high-interest debt first. 

Have you maxed out all other investments? 

If you have a 401K at work, have you maxed out your contributions? Have you maxed out your IRA contributions and started a taxable account? If you have kids, have you started a 529 Savings Plan to save for college? 

Focusing on your other investments first will help you achieve those goals later in life, rather than tying up your money in your home. 

If you’ve satisfied the above conditions, you may consider paying off your mortgage early. Here are the pros and cons. 

Pros of Paying your Mortgage off Early 

  • You’ll save money on interest 

This is the number one reason people pay their mortgage off early. The sooner you give the lender their money back, the less interest you pay. Even if you don’t pay it off in full, but knock off a nice chunk off the principal, it reduces your interest charges. 

  • No more monthly payments 

You no longer have to worry about costly monthly payments when you pay your mortgage off early. You can live in the home without worrying about the bank foreclosing on you even when you hit hard times. 

  • You can tap into the equity 

Even though you’re tying up your funds in your home, if you hit a speedbump and need the funds out, you can take out a home equity line of credit or even a reverse mortgage if you’re over the age of 62. It’s not like you tie the money up forever and when you sell the home, a majority of the funds will be yours after closing costs. 

  • You’ll have more money to save for retirement 

When you don’t have a mortgage payment, you can redirect the money to your retirement funds. If you’re consistent about contributing to your retirement, you can have a nice nest egg set up and have peace of mind knowing you own your home free and clear. 

Cons of Paying your Mortgage off Early 

  • Your funds aren’t liquid 

While you can tap into your home’s equity, it takes time and not everyone gets approved. You can’t just say you want the money, you must have the right credit score, debt ratio, and proof you can afford the loan if you want to get some of your equity back. 

  • There could be an opportunity cost with other investments 

With mortgage rates as low as they are, you’ll likely make a lot more money investing your money elsewhere and not your home. While you’ll pay interest on your mortgage, the rates are low enough that you’ll still come out ahead if you invest the money elsewhere. 

  • You’ll lose the tax deduction 

If you itemize your taxes, you’ll lose the ability to write off the interest paid on your mortgage. For many taxpayers, this is the largest deduction available to them next to property taxes which can mean a much higher tax liability. 

How to Decide if you Should Pay your Mortgage off Early 

It’s a personal decision to decide to pay your mortgage off early. For some people, it helps them sleep better at night knowing they own their home free and clear. For others, they’d rather get out of other consumer debt and invest their money in other places, giving them more liquidity too. 

Ask yourself these questions to decide: 

  • What are your financial goals, both short-term and long-term?  

This will help you decide if tying your money up in your house is smart or if you need the funds for other financial goals with more immediate timelines. 

  • Are you in over your head in debt? 

It rarely makes sense to pay your mortgage off early if you have a lot of consumer debt. Instead, focus on the debt, paying it off so you don’t pay large interest charges much longer. 

  • Are you set for retirement? 

If you aren’t set for retirement, don’t put all your money in your house. You can’t live off the funds unless you take out a reverse mortgage, but even then it doesn’t help unless you are well into your 70s or older before you tap into the funds. 

Final Thoughts 

Should you pay your mortgage off early?  

It depends on your financial situation and your financial goals. Look at the big picture, focusing on the opportunity cost of paying your mortgage off early. Make sure you aren’t cutting yourself short in other places just to say you own your home free and clear. If you have a low-interest rate, it may not make sense to pay it off early and instead invest the money elsewhere. 

Contact us for a no-obligation conversation. Valley Mortgage is the largest independent mortgage lender in North Dakota and northern Minnesota. We’ve been helping folks like you for more than 38 years. If you haven’t reviewed our website, click here. Please call us at 701-461-8450 to get all the details about home mortgages and refinancing. There’s no cost, no obligation. Valley Mortgage does all the processing right here in our Fargo, ND office.