Should You Pay Off Your Mortgage Early?

By: , Contributor

Published on: Nov 15, 2019

There are pros and cons to shedding housing debt ahead of schedule.

Most people who buy homes finance them via a mortgage. That often means signing up for a loan with a 30-year term. 

If you have a mortgage, there may come a point when you're tired of writing that monthly check to your lender. And if you're sitting on a nice pile of cash, you may be tempted to pay off your mortgage early rather than continue to let it hang over your head. But is that a smart move?

Benefits of paying off your mortgage early

Mortgage lenders don't give out home loans to be kind; they do it to make money. When you pay interest on your mortgage, that cash goes directly into your lender's pocket, and the longer you carry that home loan, the more interest your lender gets to collect. By paying off your mortgage early, you'll save yourself money on interest -- potentially a substantial amount.

Another upside to paying off your mortgage early is not having to deal with that monthly obligation any longer. The result: more freedom, more flexibility, and less stress. 

Also, in some cases, paying off a mortgage early could mean knocking out that debt before you reach your golden years. And that's a very good thing, because once you leave the workforce, you'll move over to a fixed income. Having one less draw on your limited resources will make for a more financially relaxed retirement. 

Downsides of paying off your mortgage early

While paying off a mortgage early is a smart move in many cases, there are some negatives to consider, too. For one thing, if you deplete your savings to pay off that home loan, you'll have less money on hand for a rainy day. As such, you may land in a situation where you're forced to take on more debt -- often the less healthy kind. 

Furthermore, paying off your mortgage early may not be the wisest move if the interest rate attached to your home loan is pretty low. You can instead invest your money for higher returns. 

Imagine, for example, that the interest rate on your mortgage is 3.75% (we’ll assume that’s a fixed rate, too). The stock market's historical average is around 9%, which means that if you were to invest a lump sum of cash in stocks rather than use it for a mortgage payoff, you could wind up richer.

Say you have 10 years left on your mortgage, you still owe $60,000 on it, and your loan has a 3.75% fixed interest rate. If you pay off that mortgage in the next year, you'll save yourself roughly $12,000 in interest. On the other hand, if you were to invest $60,000 over a 10-year period at an average annual 9% return, you'd grow it into $142,000. That's a difference of $130,000.

You can also take that money and invest in other types of real estate, like an income property or a real estate investment trust (REIT). These investments could generate returns that outpace the amount of interest you would save on your mortgage payment. 

Another thing to consider is that carrying a mortgage offers a tax break, assuming you itemize on your returns. If you do, you can deduct mortgage interest on loans worth up to $750,000. And if you signed your mortgage before 2018, that limit is $1 million. 

What's the right move for you?

Ultimately, there's no right answer when it comes to paying off a mortgage ahead of schedule. Weigh the pros and cons and see where you land.

If you are inclined to pay off your mortgage early, make sure there's no prepayment penalty attached to your loan. Not all mortgages have one, but if yours does, that should factor into your decision -- and perhaps sway you to keep that loan and invest your payoff cash instead.

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