Are there advantages to paying off a mortgage early? Of course there are. However, there could also be some disadvantages to consider based on your current financial standing. When considering this decision, it’s important to take into account your feelings about debt, the potential to earn a higher rate of return if the money were deployed elsewhere, possible tax savings associated with mortgage interest, future plans, and overall debt load.
Disadvantages, if any, may stem from the financial trade-offs that a mortgage holder needs to make when paying off the mortgage. Paying it off typically requires a cash outlay equal to the amount of the principal. If the principal is sizeable, this payment could potentially jeopardize a middle-income family's ability to save for retirement, invest for college, maintain an emergency fund, and/or take care of other financial needs.
If you do have the ability to pay off a mortgage early, consider the following before coming to a final decision:
- Your Feelings About Debt
Some homeowners like the feeling of security that comes with owning a home free and clear. If you fit within this category, it may be to your benefit to pay off or reduce the size of your mortgage. Should conditions in your local real estate market decline, there's less of a chance of owing more than you own.
- Your Retirement Savings
If your mortgage is relatively small, you may be able to invest the money formerly used for mortgage payments for retirement or other long-term goals. But the most critical factor here to consider is your timeline until retirement. If you have 10 years or more remaining until you expect to retire, you could have time to build a nest egg if you invest the money formerly used to pay a mortgage. If you plan to retire sooner, entering retirement without a mortgage could provide you with more flexibility to do the things you want during your later years.
- Your Tax Savings
Mortgage interest typically is tax deductible. During the early years of a mortgage, when the interest payments are highest, many homeowners benefit from a sizeable deduction. This could be important if you are in a higher tax bracket. If your interest payments are relatively low, the tax savings could be less of a factor.
- Your Future Plans
Do you plan to retire in your current home, or are you planning on a move or a downsize in the near future? Owning a home outright could be an advantage if you plan to sell it during the next few years. You could potentially leave your existing residence with more home equity.
- Your Current Debt
If you are carrying other forms of debt, such as credit card balances or a college loan, consider whether you could benefit from paying off another source of debt first before reducing or eliminating your mortgage.