Vicki Moore Pacifica Realtor
Paying Your Mortgage Off Early —What To Consider
Homeowners have asked me if they should pay their mortgage off early. The idea of having your home paid off early definitely sounds good. But, as with every big financial decision, it is important to consider all factors before you make your final decision.
At first glance, the idea of paying off your mortgage sooner is a clear winner. However, financial management, retirement planning, and investments, in general, require careful research and planning.
You have to consider your financial goals, your spending habits, the market, your future, and a variety of other factors before you can be sure which decision is the best for your situation. It’s always a good idea to talk to a financial advisor before you make any major financial decisions. They are trained to help you identify risks and potential rewards based on your unique circumstances. If you need a referral to a financial planner who can help you, let me know.
Before you talk to a financial advisor, it might be helpful to do some of your own research. The following information can help you get you started toward a general understanding of the common benefits and drawbacks of paying off your mortgage early.
Pros of Paying Your Mortgage Off Early
1. You don’t have to weigh the cost of other investments/expenses against your mortgage.
Investing is a balancing act that requires careful planning. Your mortgage is probably the most significant purchase you’ll ever make; and the cost of the interest you are paying over 30 years adds up significantly.
There are certain investments that you can and should make even if you have a mortgage—like your 401K or IRA investment accounts—but others are less clear. For an investment to make sense while you owe money to the mortgage company, it will need to deliver a rate of return that exceeds your mortgage interest.
Otherwise, you would be better paying the mortgage off early. But if you have paid the mortgage off, then you don’t need to weigh your investments against your home loan.
When money is cheap with rock bottom interest rates, keeping a mortgage is a good idea. On the flip side, if you have a high mortgage interest rate, paying off your mortgage could make more sense.
2. You can free up cash for other expenses.
Not having a mortgage payment each month will free up a lot of cash each month and decrease your level of daily stress. As an alternative, you might be able to retire early. More cash flow also gives you options for saving or investing that you would not have otherwise.
3. Get rid of your PMI.
Private mortgage insurance is required by lenders until you reach 20% equity in your home. The sooner you reach that 20%, the sooner you can stop paying PMI and put that money to better use.
Private mortgage insurance protects the lender from default and offers you, the homeowner, no benefits at all. You’re just throwing money away.
4. Convert your equity to cash.
The faster you pay off your mortgage, the more equity you will build in your home, and the better your financial options become for leveraging that equity. Eventually, you can get a home equity line of credit, or a cash-out refinance.
You can use the cash you get from these new loan options to renovate your home, pay for emergencies, or invest in another property.
Cons of Paying Your Mortgage Off Early
1. You lose liquidity.
Liquidity refers to how easy it is to get access to your money. When you put all of your cash into your home, you don’t have it available for an emergency. If an emergency sprung up and you needed cash, for example, you might have to get a home equity loan or sell your home to get the needed funds.
2. You lose your mortgage interest tax deduction.
The mortgage interest deduction is a common itemized deduction that allows homeowners to deduct the interest they pay on any loan used to build, purchase, or make improvements on their residence, from taxable income.
As of right now, you can deduct your interest payments on your mortgage each year when you file taxes. That means you get more money back each year because of the money you pay towards interest. Once you pay your home off, you will lose those deductions.
Beginning in 2018, the limits on qualified residence loans were lowered. Right now, couples filing jointly may only deduct interest on up to $750,000 of qualified home loans; down from $1 million in 2017. For married taxpayers filing separate returns, the cap is $375,000; it was previously $500,000.
Having a mortgage has become less appealing under the current tax laws.
3. Paying off your mortgage could lower your credit score.
One of the factors that go into your credit score is the diversity of the types of credit you have — the different loans you have at any one time. That could lead to a small drop in your credit score.
I don’t think that’s a big enough reason not to pay off your mortgage. If you got a mortgage in the first place, your credit score is already pretty good and the money you save by not paying interest could be significant.
4. You can’t put the money toward other investments.
It will take a focused financial plan and determination on your part to pay your mortgage off early. All that money you put towards your mortgage could be put in other investments that might yield higher returns: stocks, or other real estate like commercial or multi-unit.
Talk to a financial planner
Whether or not it makes sense to pay off your mortgage early really boils down to your specific financial and life circumstances. The same solution isn’t right for everyone.
Do your research and if you’d like a referral to a financial planner let me know. I’m happy to help. This is a complicated answer to what seems like a simple question.