Pros and Cons of Paying Off Your Mortgage Early (2024)

FAQs

Pros and Cons of Paying Off Your Mortgage Early? ›

Paying off your mortgage early is a good way to free up monthly cashflow and pay less in interest. But you'll lose your mortgage interest tax deduction, and you'd probably earn more by investing instead. Before making your decision, consider how you would use the extra money each month.

Disadvantages of Paying Off Mortgage Early

If you have credit card or student loan debt, funneling your extra cash toward paying off your mortgage early can actually cost you in the long run. This is because these other types of debt likely have higher interest rates. Less money for savings.

Dave Ramsey, the renowned financial guru, has long been a proponent of financial discipline and savvy money management. This can include paying off your mortgage early, but only under specific financial circ*mstances.

To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.

Paying off your mortgage may make sense if: You have substantial retirement savings, especially if the funds you'd be withdrawing are in a taxable account and are not earning much interest. You're downsizing.

If one of your financial goals is to lower your tax bill, you may want to avoid paying off your mortgage early. The IRS allows you to deduct the mortgage interest you pay from your taxable income, lowering your tax bill. You can take advantage of that deduction for the life of the loan.

It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to avoid ultimately paying more in interest. If you're in or near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.

Orman explained on her podcast that once you have paid off your mortgage, you will have a home you can live in without a housing payment. As she said, this is true even if your home declines in value. That is accurate. But, you can't assume your housing costs will disappear just because you have no home loan.

Being mortgage-free can make it easier to downsize in other ways – such as going part time – and usually makes it cheaper and easier to buy and sell your home. Generally, a smaller mortgage gives you greater freedom and security.

You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loan's original payment terms.

How much do I need to retire if my house is paid off? ›

In simplest terms, take a $2,500 mortgage payment out of the picture and you've just reduced your annual expenses by $30,000. Now, factor that against the amount of money you'll need to manage retirement: between 55% to 80% of your current annual income, according to Fidelity.

40% of Americans Pay Off Their House — Are They Doing Better Financially? For most Americans, a home mortgage is the biggest financial obligation they will ever have. A traditional mortgage spans 30 years and is often in the hundreds of thousands of dollars, so the interest charges can be enormous.

Absolutely. The Equal Credit Opportunity Act's protections extend to your mortgage term. Mortgage lenders can't deny you a specific loan term on the basis of age.

In an ideal world, none of us would have any debt—ever. And we'd certainly pay off our mortgages, credit cards, and car loans before we retire.

Paying off your mortgage before you retire may be a strategy that protects your retirement savings. However, it's not necessarily the best path for everyone. You should also consider making changes to your mortgage. That's where refinancing comes in.

Once your mortgage is paid off, you'll typically be responsible for future homeowner's insurance and property tax payments.

If you can afford to make extra payments, overpaying your mortgage means you pay less interest in the future and pay off your mortgage sooner. This means you could save a lot of money.

The penalty can be 2 percent of your loan balance within the loan's first two years and 1 percent of your loan balance in year three. For example, say you want to sell your home only one year after you took out a non-conforming mortgage loan to purchase it.

Faster Loan Payoff

By making two additional principal payments each year, you'll pay off your loan significantly faster: Without extra payments: 30 years. With two extra payments per year: About 24 years and 7 months.