1 Overlooked (but Important) Reason Not to Pay Off Your Mortgage Early

by Christy Bieber | Updated July 19, 2021 - First published on May 27, 2021

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If you are thinking about repaying your mortgage early, consider the costs of tying up money in a home.

If you owe money on a mortgage loan, you may be tempted to try and repay your balance early in order to become debt free ASAP. But despite how large mortgage loans can be, the interest rates on them are typically very low.

That's why you should think carefully before paying off your mortgage early. It might be a lost opportunity to put those extra payments to better use. For example, investing in the stock market could allow you to earn a higher rate of return -- especially since it can take many years to pay your mortgage off even if you are making extra payments.

There's also another big reason why you may not want to devote your extra cash to making mortgage payments that are above the minimum.

When you pay off your mortgage ahead of schedule, you're tying up a huge amount of your money in an investment that you won't have easy access to. Keep reading to learn why this isn't always a good idea.

The problem with long-term assets

Liquidity describes how easily a particular asset can be converted into physical currency without causing a loss of some of the asset's value in the process. Cash is the most liquid asset of all.

Money market accounts and savings accounts are also very liquid because you can easily get cash out of your account. Stock shares in publicly traded companies are also relatively liquid, as you can usually convert them into cash within a matter of hours or days by selling them on a stock exchange.

A house, on the other hand, is not very liquid. It's a long-term asset, meaning it can take a while before you can convert your home into cash. It can also be expensive to sell a home and turn it into cash since you'll usually have to pay a real estate agent and other closing costs, such as title insurance and transfer taxes.

Putting most or all of your spare money into paying off your mortgage could be a costly mistake -- especially if you haven't built up an emergency fund or even invested in the stock market. That's because you won't have much flexibility if it turns out you need to get the money back to cover essential costs.

Say, for example, you have a medical emergency and you need to come up with $10,000 quickly. If you have money in an emergency fund or the stock market, you should be able to get that money in days.

But if you've paid off your mortgage early, you'd likely have to sell your home, which could take months and be hugely disruptive to your life. Or you'd need to try and qualify for a cash-out refinance loan or home equity loan.

Trying to refinance or take a home equity loan out can take weeks. It could also come with thousands of dollars in closing costs. It should be noted that these types of loans may be difficult to qualify for without at least a fair credit score and proof of income -- which might be a problem if you're out of a job due to your emergency.

This is a big downside to tying up your money in a home. In case of an emergency, you're going to want fast access to your cash. That's why you should think carefully before deciding to use your limited funds to repay your mortgage ahead of schedule.

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