Why Paying Off Your Mortgage Early Might Be a Mistake
A home may be the largest purchase you ever make, so it’s understandable if you’re excited to pay off your mortgage and make that home fully yours. But rushing out of mortgage debt early isn’t the right move for everyone.
The peace of mind — and interest you’ll save on — from paying off your mortgage should certainly be considered. But take into account the downsides of making early mortgage payments, too.
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4 reasons paying off your mortgage early may cost you
Whether or not you should pay off your mortgage early will depend on your specific financial situation, so consider discussing your options with a financial advisor. But here are four scenarios in which it may make more sense to stick to your current repayment plan.
- Potential missed investment returns: Sometimes, your money can go further in the stock market. The average annual stock market return per the S&P 500 index is around 10% over the long run. Consider your mortgage interest rate, and whether making extra mortgage payments means missing out on high potential returns.
- Higher taxable income: You can deduct mortgage interest payments from your taxes, as long as you itemize your deductions. That means paying off your home could increase your taxable income, depending on your situation.
- Reduced liquidity for emergencies: Making multiple or higher mortgage payments each month reduces your available cash. If there’s an emergency and you’ve used excess cash to pay off your home, you increase the chances of having to sell stocks or take out a personal loan to cover the cost.
- Pre-payment penalties: Some lenders charge a fee for paying off some or all of your mortgage early.
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When paying your mortgage off early makes sense
As with most financial decisions, you have to weigh the pros and cons. For some people, the peace of mind is worth paying off their mortgage early. Plus, tot everyone has a high enough risk tolerance to leave money in the stock market and let it stay the course during market corrections. It’s probably better to pay off a mortgage early than to store money in a bank account with little to no interest.
You’ll also save on interest if you pay off your mortgage early, and be able to build up equity in your home faster. That will come in handy if you want to borrow against your home later in life.
People who are approaching retirement may also want to get rid of their mortgage, especially if it’s their largest expense.
The balanced strategy
Some people take a hybrid approach instead of putting all of their extra cash into the mortgage or stocks. Homeowners can split excess funds between paying down their mortgage principal and investing in stocks so that their money is growing for their future while they’re also chipping away at their debt.
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Zero debt is a great goal, but you likely shouldn’t pursue it at the cost of financial flexibility. Financial advisors recommend having some money on the sidelines for emergencies, while also investing in assets that can produce long-term wealth. As always, diversification is key: You don’t want to have all your money tied up in real estate, the stock market or another asset.