Having massive amounts of debt hanging over you can be stressful. So if you're able to save up a substantial amount of money, consider whether it would be worthwhile to pay off your mortgage early.
There are many financial factors in that decision, but you have to weigh them against some of the non-financial considerations of paying your mortgage early as well.
Financial pros and cons of paying off your mortgage early
Here are some good reasons to pay off a mortgage ahead of schedule:
- Reduces a major household expense: Paying off your mortgage early will eliminate what for many is the largest monthly payment they make. That can let you live on a reduced income or free up cash for other purposes.
- Interest savings: Over the course of a typical 30-year mortgage, the amount of interest you pay is staggering. A mortgage with a 5.3% rate will have you paying as much in interest as the principal amount of the loan. When interest rates are higher, as they have been historically, you'll end up paying more in interest than you do repaying principal. The earlier you pay off even part of your mortgage, the less you'll pay in interest.
On the other hand, the downsides of paying off a mortgage early include:
- Tax consequences: Most homeowners can write off mortgage interest expenses on their taxes as an itemized deduction. Paying off your mortgage early takes away that deductible expense.
- Loss of liquidity: Paying off your mortgage locks up money in your home. Getting future access to that equity can be difficult, requiring you either to sell your home or to take out a new mortgage or home equity loan. Keeping more money in savings ensures you'll have ready access to it whenever you need it.
- Compare with adding to investments: If you can earn better returns from investing money than what you pay in interest on your current mortgage, then paying off your mortgage early can cost you. At the same time, your savings from paying off your mortgage are guaranteed, while investment returns depend on how the financial markets perform.
Non-financial aspects of paying off your mortgage
The reasons to pay off your mortgage early go beyond the monetary:
- Peace of mind: Many homeowners feel much more comfortable having little or no debt on their homes. Paying off a mortgage can make you feel more free and less anxious, even if it may not be the best choice from a purely financial perspective.
- Simplifying your life: Having to track money that's invested in stocks can be an unwanted burden. By paying off your mortgage early, you'll have put your money toward a worthwhile effort with no investment risk.
Even financial experts give conflicting advice about whether it's smart to pay off your mortgage early. By considering both the financial and non-financial aspects of the decision, though, you'll be more likely to make the choice that's right for you.