Thinking of Paying Your Mortgage Off Early? Ask Yourself These Questions First
by Christy Bieber | Published on Nov. 2, 2021
Don't make a decision about paying off your home loan that you might regret.
Many people hope to be debt free so they can enjoy life without payments. This can make a lot of sense when you're talking about high-interest debts such as credit cards, but deciding whether to pay a mortgage ahead of schedule is more complicated.
Before you send extra cash to your mortgage lender, ask yourself these key questions to see if this is the right decision for you.
1. Do you have any other debt?
Mortgage debt is usually the least expensive type of debt. If you have other loans at higher interest rates, such as personal loans, credit cards, or car loans, you should not pay extra on your mortgage. Instead, devote any extra money to paying down your other, more expensive loans first.
2. What is the interest rate on your mortgage loan?
Mortgage interest rates tend to be around 4% or below -- with rates hitting record lows during the pandemic. This is an extremely affordable rate, and the return on investment (ROI) from paying off your mortgage debt is equal to the interest you save. Getting a 3% or 4% ROI isn't a very good return, so if you think you can beat that by investing -- very likely -- you may want to devote your extra cash to buying assets that produce a better return instead.
3. Is your interest tax deductible?
If you itemize when you file your taxes, you can usually deduct interest on mortgage loan balances of up to $750,000 (or up to $1 million, depending on when you purchased your home and took out your loan).
If interest is tax deductible, the government subsidizes the costs of homeownership. You reduce your taxable income by the amount of mortgage interest you pay, so interest isn't as expensive.
This further reduces the ROI you get from paying off your mortgage ahead of schedule, and it means it makes less sense to pay off your mortgage loan early.
4. What are you giving up by paying off your mortgage ahead of schedule?
If you put your extra cash towards early mortgage payoff, you won't have as much to invest or pay off other debt, likely accepting a lower return on your investment.
You're also putting a lot of money into an asset that isn't very liquid. It's hard to get money out of your home if you need it -- you have to sell your house, refinance your mortgage, or take a home equity loan or line of credit. If you invest in more liquid assets, you're more easily able to access your money if the need arises.
Giving up freedom, flexibility, a better ROI, and a valuable tax deduction may not be worth the benefits of early mortgage payoff. Ask yourself these questions and carefully consider the answers so you can make an informed choice about what's best for your needs.
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