Mortgages account for the most common type of personal debt in the United States. Why? Because when you take out a home loan, depending on the type of mortgage, you generally finance 80% of the home price. But the total cost of a mortgage isn't just the actual price tag on a home, it includes the interest you pay on the loan itself.
For example, if you take out a 30-year fixed mortgage loan, you can plan on sending a payment (covering both your principal, interest, and homeowners insurance) to your lender for the next three decades—unless you decide to pay off your mortgage early.
Getting out from under your mortgage—if you can afford to do it—may offer advantages that can positively impact your finances, as well as your quality of life, especially in retirement.
Below are four reasons to consider if paying off your mortgage early is beneficial for your long-term financial prospects.
Key Takeaways
- Paying off your mortgage early could free up your cash for travel, retirement, or other long-term plans.
- Being mortgage-free may insulate you from losing your home if you run into financial difficulties.
- The interest accrued on a home loan can run upwards of tens of thousands of dollars during the lifetime of the mortgage.
1. You Can Tackle Other Debts
One of the biggest benefits of paying off a mortgage is having more financial security over a long-term basis. Without the burden of a mortgage to pay every month, you may find yourself with extra breathing room in your budget.
If you were struggling to pay bills before your mortgage was paid off, you will be able to redistribute the money you would have paid on your mortgage towards high utility bills, credit card balances, college loans, and other kinds of debt.
2. It Reduces the Cost of Interest
A huge financial liability that homeowners deal with when applying for a mortgage is the hefty cost of interest on the loan. The longer you carry a mortgage, the more you pay in interest.
By paying off your mortgage early, you may save significantly due to the additional cost of interest, especially if your home loan had a high interest rate when you took out your mortgage.
3. It Provides Protection During Unstable Housing Markets
A major concern for many homeowners, especially if they remember the Great Recession, is the impact that an unstable real estate market can have on homeowners. Being able to keep up with your mortgage payments during a large-scale financial crisis is a real concern for many homeowners.
For example, if you find yourself in need of cash suddenly, and you want to tap equity out of your house, it may be difficult to do if the value of your home goes down due to an unstable market.
But if you have paid off your mortgage, at least that monthly financial burden is lifted, and you can wait for the market value of your home to improve.
Some financial experts caution that you should not sacrifice your retirement in order to pay off your mortgage. If you are retired, it may pay to weigh the pros and cons of paying off a mortgageversus boosting your retirement accounts.
4. It Provides Financial Freedom to Pursue Other Ventures
A pleasant advantage of paying off your mortgage, assuming you have no other debt, is that it may give you the financial freedom to pursue other ventures.
Whether you have always dreamed of living somewhere tropical, traveling around the world, or owning your own business, having extra money in your bank account every month will allow you to pursue other economic opportunities.
Should You Invest or Pay Off Your Mortgage?
That depends on the state of your finances, what the interest rate on the mortgage is, and how close you are to retirement. Paying off your mortgage early could save you years of interest payments. Investing the money you were going to use to pay off your mortgage early could result in higher returns than the cost of the loan's interest. The caveat is that investing brings the risk of losses.
What's the Downside of Paying Off Your Mortgage Early?
When you pay off your mortgage early, you lose the opportunity to deduct the interest you pay on a mortgage loan. When you itemize your deductions, the interest you pay on a loan is deductible up to $750,000 if you're single, and up to $375,000 if you're married, filing jointly.
What Debts Should You Pay Off First?
There are different schools of thought on how to approach debt, but most financial experts agree that if you have credit card debt with a high APR, you should pay that off first.
Some people might wonder if they would be better off investing the money that they would use to pay off a credit card. But sustaining a high-interest credit card for any period of time would most often negate the benefits of any investing you might do with the money you're using to pay off the card. That's because the rate of return on your investment would have to be hefty enough to surpass the financial impact of the growing debt from your high-interest credit card, which could be adding on 19.95% or more in interest each month.
Paying off credit card debt also helps improve your credit score, which can improve the interest rate you qualify for when you apply for or refinance a mortgage. Mortgage, student loan, and other lower-interest loans should come next.
The Bottom Line
Paying off a mortgage is a dream for many homeowners. If this goal is within reach for you and your family, it might be a smart move to satisfy your mortgage balance.
Not only will it free up extra money every month, but it provides added financial security during a housing crisis, allows you to save more, and may even let you chase down your dreams that need extra financial backing.
FAQs
You might want to pay off your mortgage early if …
You want to save on interest payments: Depending on a home loan's size, interest rate, and term, the interest can cost hundreds of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses.
Is it ever a good idea to pay off your mortgage? ›
You might want to pay off your mortgage early if …
You want to save on interest payments: Depending on a home loan's size, interest rate, and term, the interest can cost hundreds of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses.
What happens after you fully pay off your mortgage? ›
Don't Forget About Taxes and Insurance
Your loan servicer held the funds in escrow and made the payments on your behalf. But now that your mortgage is paid off, your lender will close your escrow account and send you the remaining balance. And you'll be responsible for paying your insurance and taxes on your own.
Are there disadvantages to paying off a mortgage early? ›
A: If you put extra resources toward a home loan, you'll no longer have access to that cash flow and that's one of the disadvantages of paying off a mortgage. That means it's important to establish an emergency fund first — generally three to six months of living expenses — for unexpected financial needs.
Is it better to be mortgage free? ›
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.
How does paying off your mortgage affect your taxes? ›
Should I pay off my mortgage early? There are both pros and cons to paying your mortgage off early. While you save on interest and have extra funds to use elsewhere, you will lose the federal mortgage interest tax deduction and could miss out on more lucrative investments.
At what age should you pay off your mortgage? ›
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.
Is there any reason I shouldn't pay off my mortgage? ›
You may not want to pay off your mortgage early if you have other debts to manage. Credit cards, personal loans and other types of debt usually carry higher interest rates than your mortgage interest rate. Remember, the higher the interest rates, the faster your accounts accrue debt.
What does Suze Orman say about paying off your house? ›
Orman explained that if you have a 30-year mortgage and you've already made payments for 14 years, you should make it a point to get a refinanced mortgage paid off in 16 years. Otherwise, if you refinance for another 30 years, you'll end up paying for your mortgage with interest for 44 years in total.
Will my credit score go up after paying off mortgage? ›
Paying down the loan can have a positive impact on your credit score, he said. In addition, if you don't have many other established credit accounts but have been making your mortgage payments on time, that helps establish a history of responsible credit management.
Once your mortgage is paid off, you'll typically be responsible for future homeowner's insurance and property tax payments. Establishing a pre-emptive plan to manage these payments independently can help keep things running smoothly.
Is it better to pay off mortgage or keep money? ›
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.
Is it smarter to pay off your mortgage? ›
For guaranteed savings and the security of owning your home debt free, paying off your mortgage earlier is a better option than investing your extra cash.
What are the psychological benefits of paying off mortgage? ›
Once debt is paid off, your self-confidence can make a fast turnaround. Some individuals even share their debt stories out of a renewed sense of confidence, according to Dlugozima. “You become more open about it because you've gotten through the other side,” said Dlugozima. “It's empowering.”
Is there a disadvantage to paying off a mortgage? ›
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.
What are the benefits of owning a home outright? ›
No monthly payments: If you pay for your home in full, that means you don't have to worry about rising interest rates or monthly mortgage bills. Immediate ownership: If you pay for a home in full, you own it outright. That means no risk of foreclosure by a lender.
What happens when my mortgage is paid off? ›
Once your mortgage is paid off, your lender will remove their charge (their legal right to secure a debt against your home) and will return your Title Deeds if you want them. Title Deeds are paper documents showing the chain of ownership for your property.
Is it good to have a paid-off house? ›
“It feels good to have it paid off before retirement. It might not always make financial sense, but it offers peace of mind and it might allow for better budgeting.” Another potential advantage is the ability to borrow against the equity in your home.
What happens to escrow when you pay off a mortgage? ›
Once mortgage payoff funds are posted, money held in escrow with your current lender will be returned to you from that lender. The existing escrow account cannot be transferred unless your current lender is the same as your new lender, in which case your payoff will be reduced by your current escrow balance.
Do most people pay off their mortgage? ›
Even with low-rate mortgages, the bulk of monthly payments go toward interest, not principal, sometimes for 10 or more years. Thus, it's not uncommon for Americans to want to pay that debt down as fast as possible. In fact, according to Census Bureau data, nearly 40% of Americans already have.
You Can Get a 30-year Mortgage at Any Age
The lender may not deny a loan because they don't think you'll live long enough to pay it off.
Is it better to retire without a mortgage? ›
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.
Is it worth paying off mortgage now? ›
Paying your mortgage off early, particularly if you're not in the last few years of your loan term, reduces the overall loan cost. This is because you'll save a significant amount on the interest that makes up part of your payment agreement.
Is it better to have cash or pay off mortgage? ›
For guaranteed savings and the security of owning your home debt free, paying off your mortgage earlier is a better option than investing your extra cash.
When should retirees not pay off their mortgages? ›
Paying off your mortgage may not be in your best interest if: You have to withdraw money from tax-advantaged retirement plans such as your 403(b), 401(k) or IRA. This withdrawal would be considered a distribution by the IRS and could push you into a higher tax bracket.
How good does it feel to pay off mortgage? ›
If you pay off your house, you will feel an elevated level of happiness for maybe up to six months, but probably closer to one-to-three months.
