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7 Pros and 8 Cons of Early Mortgage Payoff

By Christy Bieber - Sep 24, 2022 at 12:10PM
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7 Pros and 8 Cons of Early Mortgage Payoff

Paying off your mortgage early may seem like a wise financial goal -- but is it?

Generally, repaying debt is good because you can avoid interest costs and stop making monthly payments.

But what about your mortgage? A home loan is far different from a credit card or even a personal loan. As a result, early mortgage payoff may not be the best choice in every situation.

To decide whether you should aim to make extra payments to your mortgage lender, consider these pros and cons of early payoff.

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1. Pro: You'll be debt-free sooner

Debt can impact your life in many ways. You'll have a monthly payment to make, and knowing you owe money can be stressful.

If you dislike owing a lender, paying off your mortgage early will help you escape that fate. You will have the peace of mind of knowing you don't owe anything and that your future income is yours to spend as you'd like.

ALSO READ: Why Becoming Debt-Free Isn't One of My Goals

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2. Pro: You'll save on interest over time

If you pay off your mortgage loan early, you will not pay interest for as long, resulting in money saved. The sooner you pay off your home loan, the bigger the savings.

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3. Pro: You won't have a monthly mortgage payment

Obviously, if you pay off your mortgage ahead of schedule, you will have more years when you have no mortgage payment. This can give you a lot of flexibility to do other things with your money later in life. You can also make sure your home loan is paid off before retirement, which means you will not need as much money in your later years.

ALSO READ: This One Choice Can Add Hundreds to Your Mortgage Payment -- but It Can Sometimes Be a Good Move

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4. Pro: You will own your home free-and-clear

Once your mortgage is paid off, you will take title to your home, and the bank will no longer have a lien on it. Your home will belong to no one but you. For many people, owning a home outright is a key part of the American dream. And you'll achieve it sooner if you make extra payments and get the loan taken care of ASAP.

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5. Pro: You won't have to worry about being able to sell for enough to pay off your loan

If you have a mortgage and want to sell, you will need to make sure you can make enough profit to pay off your loan in full. Otherwise, you would have to bring cash to the table or get your lender to approve a short sale that could ruin your credit.

If you own your home outright, this isn't a concern. Having no loan to pay off enables you to walk away with the proceeds rather than worry about whether you can cover all your costs.

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6. Pro: You may be more easily able to get other loans

Lenders look at your debt-to-income (DTI) ratio when deciding whether to give you a loan. Without a monthly mortgage payment, you will have far lower debt payments and a better DTI. This can open the door to being able to qualify easily for other affordable financing options if needed.

ALSO READ: Debt-To-Income Ratio: What It Is and Why It Matters

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7. Pro: You will get a guaranteed ROI

When you repay your mortgage early, you get a guaranteed return on your investment. You will definitely save on interest costs. There's no risk that you will lose the money you're using to pay off your mortgage as you might if you purchased stocks, cryptocurrency, or many other assets that come with inherent risks.

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8. Con: Your only ROI is the saved interest

Although you get a guaranteed ROI when you pay off your mortgage early, your only guaranteed return is the interest you save. And mortgages typically have pretty low interest rates. If you pay off a 4% fixed-rate loan a year early, you've gotten just a 4% return on your money.

ALSO READ: What is a Good Return on Investment?

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9. Con: There's an opportunity cost to early mortgage payoff

When paying off your mortgage early, you must make extra payments toward it. You cannot do anything else with that money as a result. There are many relatively safe investments you could make that would likely enable you to earn a better return than the ROI you get from saving on mortgage interest.

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A house with a Sold sign pasted over the top of a For Sale sign in a yard.

10. Con: You'll have a lot of money trapped in an illiquid asset

If you pay off your mortgage early, you may be over-invested in real estate -- especially if you were making such big payments to your mortgage that you could not invest in other things. Real estate is a very illiquid asset, though. So you'll be taking up a substantial portion of your net worth in a property that could be expensive and time-consuming to sell.

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11. Con: Your mortgage would have effectively gotten cheaper over time

If you have a fixed-rate mortgage, your monthly payment never changes. But the value of the money you are paying goes down over time. Say your monthly payment is $1,000 today. It will still be $1,000 in 20 years, but the $1,000 will be worth much less in real terms due to the effects of inflation.

ALSO READ: What Is Inflation?

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12. Con: Accessing your equity can be a challenge

If you've made extra mortgage payments and decide you need that money back for other things, it won't be an easy process to get it. You'll generally need to take a home equity loan or line of credit unless you want to sell your home. This can take time and cost money in up-front fees and closing costs.

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13. Con: You'll miss out on the mortgage interest deduction

If you itemize deductions rather than claim the standard deduction, you can deduct interest on mortgage loans up to $750,000. You will miss out on that deduction if you pay off your home loan early. You're giving up the chance to let Uncle Sam subsidize your monthly housing expenses.

ALSO READ: Can I Deduct My Mortgage Interest?

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14. Con: You'll still have housing costs to pay

Owning your home outright does not mean you will have no housing costs. You will still have to pay property taxes and insurance. This could be a letdown if you were hoping you would no longer need to worry about making payments to keep living on your property.

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15. Con: You won't be able to cash in your investment without selling

Finally, deciding to cash in on your investment would mean selling your house. Many people don't want to do that. And that can be a problem if you've sunk a lot of money into early loan payoff and don't have big investment accounts that will produce the income you need to fund your retirement.

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Is paying off a mortgage early right for you?

For most people, early mortgage payoff ends up not being the best choice because the ROI is low, and you could make better investments elsewhere. But ultimately, you'll need to consider your desires and goals.

If you just really want to be debt-free despite the possibility you could get a better return with other investments, you may decide to move forward with sending extra payments to your lender. Just be sure you go into this decision with both eyes open and a full understanding of the downsides.

The Motley Fool has a disclosure policy.

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