3 Downsides (and 2 Upsides) of Paying off Your Mortgage Early

You should consider both the pros and cons of paying off your mortgage early before you act.

Paying off debt early is often a smart move. But not always.

In fact, if you have one particular type of loan -- a home mortgage -- then there are plenty of reasons why you may not want to repay it ahead of your scheduled payoff timeline.

If you've been thinking about trying to pay off your mortgage early, consider both the three big downsides and two benefits of making this financial move.

Three big disadvantages of early mortgage payoff

When it comes to the biggest disadvantages of making extra payments on your mortgage, here are the three things to consider.

1. There's an opportunity cost to paying off your loan early

With a limited supply of money, making the choice to pay off your mortgage ahead of schedule means not using that money for other things. That decision could be a missed opportunity to do a number of things, including:

• Save more for retirement by investing in an IRA
• Build up an emergency fund
• Invest in the stock market

2. You'll get a low rate of return

When you repay any debt ahead of schedule, the return you get is the saved interest. Mortgage rates are usually very low, especially when compared to other kinds of debt. In fact, in recent months, many people have been able to get a 30-year fixed rate mortgage loan at a rate of around 3% or less.

That means paying off your mortgage early gives you a pretty low rate of return. This is especially true if you consider that you can invest in an S&P 500 index fund, which could earn around a 10% average annual return on investment (ROI).

3. You could lose your mortgage interest tax deduction

If you itemize when you file your taxes, you likely deduct the interest you're paying on your mortgage. That means your interest payments don't reduce your taxable income by as much and the government subsidizes some of them. If you pay off your mortgage ahead of schedule, you will lose this deduction and your income tax bill could go up.

Two big benefits of early mortgage payoff

Although these three downsides are definitely worth thinking about, there are also two big upsides of paying off your mortgage loan early. And you should consider these as well.

1. You'll save money on interest

Obviously, if you pay off your mortgage quickly, you'll be paying interest for a shorter period of time. And by cutting off that time and reducing your interest cost, you keep more money in your pocket rather than sending it to your creditors. The sooner you pay off the loan, the more interest you'll save.

2. You'll get the freedom that comes with being debt-free

Once you've repaid your mortgage, you will have one less monthly bill to worry about. You can redirect that money toward other things. Or you can start living on less income, which gives you the flexibility to work less.

Ultimately, you'll have to decide if these benefits outweigh the downsides. For some people, the interest savings and the mental benefits of being debt-free make early mortgage payoff the right choice.

For others, the opportunity costs are simply too great and they feel it's best to redirect their money elsewhere while paying only the minimum on their loans. Only you can decide which of these groups you fall into.