Living mortgage-free is always a good thing, right? Paying off your mortgage early sounds like the most responsible and practical thing to do. And for some, it could be.
However, there are drawbacks that may outweigh the benefits depending on your financial situation.
When evaluating your options it’s important to keep in mind your financial goals, spending habits, and trends in the housing market.
According to REDFIN, these are the top five pros and cons of paying off your mortgage early:
The Pros:
● It helps build home equity.
The equity of your home (the share of the home that you actually own) can increase over time as your mortgage is paid off and as the property value increases. You can tap into your home’s equity and use it towards almost anything, such as paying for home renovations, paying off other debts, or covering emergency expenses.
● It is one less recurring payment.
Eliminating your mortgage will decrease your recurring household bills and free up cash to put towards investments and into retirement.
● Save thousands on interest payments.
If you’re able to pay off your mortgage early, you could end up saving thousands or even tens of thousands of dollars you would otherwise be putting toward interest payments charged for the loan.
● It offers peace of mind.
Some people find that owing money is stressful. Removing a financial burden and living debt-free can improve the quality of life.
● It provides protection from inflation.
Any cash you hold will lose its value over time as inflation continues to rise, especially if your money is sitting in a savings account. However, if you pay off your mortgage early, your home and money will be put to better use and better protected from inflation.
The Cons:
● You’ll reduce your savings.
Yes, you’ll free up money you would otherwise be putting toward your mortgage if you pay it off early. But if you are using all your available cash to cover your mortgage you may find yourself financially strained. Be sure to leave enough money available to cover living expenses for the next three to six months.
● Other investments may perform better.
Putting money towards other investments rather than paying off your mortgage could be more profitable, especially if you have a low-interest rate on your mortgage. The amount you’d earn through other investments will likely exceed the amount you would save in interest payments on your home. You may miss out on opportunities to invest if you end up paying off your mortgage early.
● Tax deductions will be lost.
Because interest you pay against your home loan lowers your taxable income, your refund will often increase. However, you’ll no longer be able to deduct mortgage interest on your tax returns once your home is paid off.
● You still have other debts to pay off.
Low introductory rates – even as low as zero percent typically only apply for a short period of time before increasing. Paying off other high-interest debts such as school loans, car loans, and credit card debt should be prioritized before paying off your mortgage.
● More equity, but less liquidity.
It’s important to have a portion of your money readily available in case of financial hardships or an emergency. Your home is recognized as a non-liquid asset because it could take months to sell your property. You may end up having to borrow money if all your cash is tied up in your mortgage.