Should you pay off your mortgage early?

A home mortgage will likely be the biggest debt in your life. Traditionally, a mortgage loan is paid off over the course of 30 years (although I have seen 40 year loans as well). To many people (including myself), 30 or 40 years is an interminable length of time to pay off a loan. So, should you pay off that mortgage early? Before I answer, lets look at some of the pros and cons of an early mortgage pay off.

Benefits of an early mortgage pay off

  • As with any debt, paying off your mortgage is a guaranteed return; no matter how the markets fluctuate, any additional payments made on the mortgage will lower your overall debt load.
  • If you are paying private mortgage insurance (PMI), the sooner you have more than 20% equity in your home, the sooner you can stop paying PMI. PMI is typically 0.5% of your yearly mortgage, and usually is not tax-deductible.
  • By paying off your mortgage early, you will reduce your cost of living. Sure, you may have to make some sacrifices early on, but the benefits of can’t be overlooked. Who couldn’t use an extra $1000 each month?
  • It is fairly easy to motivate yourself to pay off the mortgage early. While many people have trouble motivating themselves to save for retirement (after all, age 70 seems very distant when you are 26), paying off that mortgage early is a short-term savings goal (at least compared to saving for retirement). And research shows that short-term goals are the ones we are most likely to accomplish because we receive the benefits far sooner than long-term goals.
  • You will have the piece of mind that comes from truly owning your own home. To me, this is the biggest advantage of all.

Benefits to not paying off the mortgage early

  • Typically, the primary reason that homeowners don’t pay off their mortgages early is to enjoy tax advantages on the interest paid. However, this advantage is not as great as it may seem. Keep in mind that the tax benefit is limited to the extent that your itemized deductions exceed the standard deduction. Also, since mortgage payments progressively consist of more principal and less interest, the amount you can deduct declines each year. In short, don’t overestimate this advantage.
  • A mortgage is the cheapest debt you will ever have. Interest rates are low, and the interest you pay is tax-deductible. So, if you have other debts, it does not make economic sense to pay off the mortgage.
  • Don’t neglect other investments just to pay off the mortgage. If you don’t have rainy day savings and don’t have a retirement fund, focus on building those investments up before trying to pay off the mortgage.
  • You can earn a higher return on your investments than your mortgage rate. While rate of return on savings/money markets are not that great, investing in stocks, mutual funds, and ETF’s are a whole different matter. With the current low mortgage rates, it is not too difficult to find an investment vehicle that will yield more than your mortgage rate.

Should you pay off your mortgage early?

Let me start with the short answer….maybe. When considering paying off your mortgage sooner rather than later, you must examine your financial situation and both short and long-term goals. How long do you plan on living in your current house? What is your current rate and term on your loan? Do you carry several other debts like a car payment or student loans that you wish were off your plate? What is a more valuable goal to you, paying down high-interest rate debts like credit cards or paying toward owning your home free and clear?

While I realize that not everyone will agree with me, here is my personal view. Before paying off the mortgage, it is important to both have a rainy day fund and to contribute to a retirement fund. Second, all other debt should be paid off before the mortgage….after all, the mortgage is the cheapest debt you will ever have. After all of that is done, then I would focus my attention on paying off the mortgage. while I realize that I could come out ahead by keeping the mortgage and focusing on investing, owning a home outright is a huge goal for me.

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