The question, “Should I pay off my mortgage early?” seems like it should have an obvious answer. Of course you’d want to pay off your mortgage early, who wouldn’t? You’d no longer have to deal with the pressure of your mortgage payments, free to spend the money you set aside every month on other things.
At the same time, prepaying a mortgage can have serious implications you might not have considered. Financial advisers often warn against this kind of decision, citing all the disadvantages to homeowners who deal with their mortgage sooner than expected.
So what are the pros and cons of paying off your mortgage early? We’ll walk you through everything you need to know, looking at some of the most compelling reasons to prepay a mortgage and the risks associated with that decision.
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Disadvantages of Prepaying a Mortgage
1. Issues With Tax Strategy
Homeowners often leverage their mortgage as a key component of their tax strategy. More specifically, they deduct mortgage interest. You may not have the option to itemize deductions without mortgage interest — a crucial consideration if you currently depend on it.
Then again, deductions for mortgage interest might not matter if you’re nearing retirement. If you’re in the later stages of your life, freedom from debt may seem more appealing than other options. It depends on your specific situation and personal objectives.
2. Higher Borrowing Costs
Some homeowners choose to pursue a home equity loan or home equity line of credit (HELOC). If you decide to borrow against your paid-off home at a later date, it could cost you much more than it otherwise would. Interest rates are likely to rise in the coming years, and an uptick of just one percentage point could increase your monthly payments by a significant margin.
Beyond these projections, you also have to accommodate the tightening credit standards. They’ve changed dramatically since the housing collapse that kicked off in 2006. If you want to tap home equity in retirement, you may find it difficult with the changes to your credit score and income profile.
3. Restrictions in Liquidity
When you keep your mortgage and the money you would have used to cover it, you’re building your personal balance sheet. The mortgage represents another liability, of course, but your balance sheet will also have more in terms of assets, or cash. Prepaying your mortgage has other repercussions.
Eliminating your mortgage with cash will leave less for unexpected expenses or investment opportunities. Limiting your options in this way is potentially risky if something comes up. It’s easy to see why financial advisers warn against prepaying a mortgage given the downsides of the decision.
Advantages of Prepaying a Mortgage
1. Freedom From Mortgage Payments
As mentioned earlier, you’ll no longer need to manage any payments when you’ve eliminated your mortgage. That freedom is an incredible opportunity to spend your money elsewhere, whether you funnel it into your retirement savings or buy something nice for yourself.
Either way, you may have more cash on hand month-to-month to cover your expenses. It’s an attractive prospect for pretty much anyone, providing a greater degree of flexibility. Whether you have student loans, credit card debt or other payments you need to make, you’ll feel far less pressure — unless you throw so much of your savings into your mortgage that you end up on financial thin ice.
2. Greater Security in Retirement
An increase to your monthly 401(k) contribution can help ensure your comfort in retirement. When you channel your excess cash into your savings, you’ll feel far better about your financial situation in your golden years. Any stress you might have felt over your finances will lift.
Among other considerations when prepaying a mortgage, your retirement should rank as a high-priority item. It’s all too common for retirees to struggle with their savings, but you don’t have to count yourself among them. Paying off your mortgage can potentially give you the freedom you’re hoping for.
3. More Attainable Financial Goals
The financial goals you’ve set for the far future may seem more attainable once you’ve handled your mortgage. For example, you might want to set aside a certain amount of money for your children’s or grandchildren’s college fund. This is much easier to achieve without the burden of a mortgage.
Whatever you choose to do, it’s best to discuss your plans with a financial adviser and tax professional. They can lead you in the right direction and away from potential pitfalls. Just weigh your options, set realistic expectations and organize a plan before you move forward.
Paying Off Your Mortgage Early is a Loaded Decision
The question, “Should I pay off my mortgage early?” doesn’t have an obvious answer. On the one hand, you may encounter issues with your current tax strategy, future borrowing or liquidity. On the other hand, you’ll have freedom from your mortgage payments, greater security in retirement and more attainable financial goals.
As you move forward, make an informed decision about your mortgage. Keep both sides of the issue in mind and apply your research to your specific personal circumstances. At the end of the day, it’s a financial decision only you can make.