Once you’ve paid off your credit cards, your student loans, and any other non-mortgage debt you have, you inevitably start wondering what life would be like if you were completely debt-free, with no mortgage payment. (Don’t even consider paying off the mortgage first if you’ve got other debts to worry about!)
But is paying off your mortgage early a good idea?
You might consider paying off your mortgage early if:
Your interest rate is higher than the amount you would earn by investing the money. Most people tend to have low interest rates on their mortgages these days, but if you plan on keeping the money parked in a savings account earning 1% and the interest rate on your mortgage is 5%, it may make sense to apply the money toward your mortgage instead.
The remaining balance on your mortgage is low. If you’ve paid off most of the mortgage and the remaining balance is fairly small, you probably aren’t getting much of a tax deduction from your mortgage since the bulk of your monthly payment is principal rather than interest. In that case, paying off the mortgage can free up cash each month that can be invested elsewhere for maximum income.
You really want the peace of mind of being debt-free and could use the monthly payment for other things. The idea of being completely debt-free is definitely an attractive one, and if you can afford to pay off your mortgage, you’ll free up money each month that can be directed toward something else. But before you get too excited, read on.
You probably don’t want to pay off your mortgage early if:
You don’t have an adequately funded emergency fund, or are saving for any big expenses. It can be difficult to get money out of your house, and at the very least it takes time (e.g., you have to wait a while for a home equity loan to be approved). It’s better to invest this money in other, more accessible vehicles in case you need to tap into these funds.
You haven’t maxed out your retirement savings. You probably already know all about the magic of compound interest, which is why experts recommend stashing as much money in tax-advantaged retirement accounts as possible before you pay off your mortgage. You can always pay off the mortgage after you’ve saved for retirement, but you won’t be able to get those pre-retirement years (and the compounded interest) back.
You want to maximize your credit history and/or credit score. If you’re in position to pay off your mortgage, you shouldn’t have any other debts. But debt – and making timely payments – have the biggest impact on your credit score. So if you think you might need credit, whether to take out a loan or open a new credit card, paying off your mortgage may not be helpful.
The bottom line: Whether you should pay off the mortgage is complicated question, and if you are seriously considering it, you might benefit from talking it over with a financial advisor.