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Pros and Cons of Paying Off Your Mortgage Early

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Whether you have been paying on a mortgage for 2 years or 20 years, the dream of owning a home free and clear has likely popped into your head. You may have wondered how long it will take or how much money it will cost if you keep your mortgage until its full term. Similar to the process of weighing the pros and cons of buying a house, it is important to review the advantages and disadvantages of paying off a mortgage. This week’s blog will outline the key points for consideration.

Advantages

  • Peace of mind- For many people, a mortgage is the biggest liability on their balance sheet and wiping it away might be an incredible relief.
  • Save on interest payments- Over the term of the loan, you will pay less interest if the mortgage is paid off early, and the savings can often be very significant.
  • More financial flexibility- By removing the mortgage payment, more income is available to allocate to other goals and dreams.
  • Retirement flexibility- If you no longer have to pay your mortgage, you might be able to decrease the amount you withdraw each year from retirement accounts.

Disadvantages

  • Reduced liquidity- It is much easier to access funds sitting in an investment or bank account than to access funds from home equity.
  • More beneficial use of funds- Money that has been used to pay off a mortgage is no longer available to invest elsewhere, at potentially higher rates of return.
  • Loss of tax deductions on interest payments- Homeowners who maintain their mortgage enjoy a tax deduction on the interest paid.  This will be lost when the loan has been paid in full.
  • Carrying debts that have higher interest rates- It is likely that your mortgage interest rate is significantly less than rates associated with your credit cards or auto loan. Most strategies call for eliminating the debt with the highest interest rates first. Additionally, interest payments on such loans are not tax deductible.
  • Prepayment penalty- Homeowners should consult the terms of their mortgage contracts, as some can include pre-payment penalties if the loan is paid off too quickly.

When considering paying off a mortgage sooner rather than later, you must examine your financial situation, which includes both short-term and long-term goals, as well as potential tax implications. It is always prudent to speak with your tax advisor and financial advisor before making this important decision.

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