Should I pay off my mortgage or save? (2024)

FAQs

Should I pay off my mortgage or save? ›

Putting money in savings, even with today's very low returns, may be better than paying down a mortgage. Paying down might result in a better 'return' than an alternative investment, but houses aren't liquid—they aren't a source of immediate cash—especially in today's market.

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.

Paying off a mortgage early is often a consideration for homeowners looking to retire early or stay in their homes for an extended time. Ultimately, the decision comes down to personal preference and whether the benefits outweigh the costs. Consider any prepayment penalty and the potential tax consequences.

Paying off any debt that accumulates interest is always a sensible option as, more often than not, the interest cost of a debt will be higher than the interest earned on savings.

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.

Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

The Downside of Mortgage Prepayment

Prepaying your mortgage ties up your funds in your home, potentially leaving you with less liquidity for other financial needs or opportunities.

In principle, if you're offered a higher interest rate on a savings account than the rate you pay on your mortgage, it could mean it's best for you to save. However, if you're paying a higher interest rate on your mortgage than you could earn from a savings account, it might be best to pay off your mortgage first.

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.

Rule of thumb? Aim to have three to six months' worth of expenses set aside. To figure out how much you should have saved for emergencies, simply multiply the amount of money you spend each month on expenses by either three or six months to get your target goal amount.

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.

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.

While paying down high-interest debt will help you reduce the amount of interest you owe, not having an emergency fund can put you deeper in the red when you have to cover an unexpected expense. “Regardless of [your] debt amount, it's critical that you have money set aside for a rainy day,” Griffin said.

Invest money

From a financial perspective, if you can earn a higher rate of return through investing than you pay toward your mortgage, it's better to invest. But this decision isn't only about dollars and cents, there are other factors to consider.

The risks of keeping cash at home

You don't have FDIC insurance: When you deposit money in an FDIC-insured bank, you can take comfort knowing that your deposits will be protected and reimbursed up to $250,000 if the bank fails. For credit unions, insurance is provided by the National Credit Union Administration (NCUA).

Your decision should be based on what works best for your current situation and future plans. But if your budget allows for a larger down payment, it can potentially lead to lower monthly mortgage payments and less interest paid over the life of your loan, providing long-term financial benefits.