Pros / Cons of Paying Off a Mortgage Early?Daniel Dobbs2023-05-26T08:40:47-07:00
As an MLO, I often receive inquires about how to pay off a mortgage.
Other than paying a third party a fee to set up a “bi-weekly mortgage payment plan; there’s a variety of good options.
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The account setup fee is wasted money, and the account administrators are usually “less than competent” in administering the account, often resulting in late payments, damages, and trashes the client’s FICO scores.
Before a homeowner decides to use inheritance, liquidate savings to pay off a mortgage (or even before homeowners begin to make extra payments), it’s essential to take a step back and determine whether it makes financial sense.
Here’s what a homeowner needs to know as they decide whether to pay off a mortgage early.
Pros and Cons
of Paying Off Your Mortgage Early
Pros
– Eliminates a monthly mortgage payment, freeing up cash flow that can be useful, especially during retirement
– Saves thousands of dollars in interest.
– Grants peace of mind knowing the home is owned outright
– Can tap the equity with a HELOC, in case money is needed later
Cons
– Ties up a good chunk of liquidity and net worth in the home, which may make it harder to access later
– No longer eligible for the federal mortgage interest tax deduction
– Could miss out on potentially higher returns from other investments
Tips to Pay off Mortgage Early
If you decide that it makes sense to pay off your mortgage early, be careful not to put your other financial goals at risk.
Here are some tips.
1) Retirement Accounts come FIRST:
Homeowners, make sure you’re putting money into a tax-advantaged retirement account, like a 401(k) or IRA.
If the homeowner’s employer offers a match, take advantage of it, and work on building a nest egg.
2) Pay off high-interest debt before making extra payments.
Other debt like credit card balances might have much higher interest rates than your mortgage, so if you pay off your mortgage early instead of tackling that, you could end up behind.
Credit card debt, personal loans, and even car loans usually cost you more, and the interest isn’t tax-deductible.
3) Build up an emergency fund.
It’s a good idea to have an emergency fund before making extra mortgage payments.
3a) Pay off the home and then apply for a HELOC; that way, the homeowner maintains liquidity and can access funds in a pinch.
4) Work on other goals.
Homeowners have various other financial goals, like a car purchase or saving for a child’s education. They should stay on track for those goals.
– Refinance: Think about refinancing your mortgage to a shorter loan term, such as switching to a 15-year loan from a 30-year mortgage.
Making higher payments each month is a way to can save on interest and still be out of debt sooner.
Bottom Line
Sometimes, it’s not a straight assessment of what’s best by the numbers with financial planning.
People want to feel good about where their money is going — no matter what the spreadsheet says.
For some, owing money causes stress, and paying off a mortgage early can bring peace of mind.
For people nearing retirement, a paid-off mortgage means they have that much more free cash flow from their fixed income when they stop working.
