Should you pay off your mortgage early

Should You Pay Off Your Mortgage Early?

Do you know if you should pay your mortgage off early or not? Or what the pros and cons are of paying your mortgage off earlier than you have to? This article was written by personal finance author Tom Madison, and we are excited for him to share his view on this topic.

If you have a mortgage, it may feel like you will never finish making those monthly payments. For most, mortgage payments often start when you are just beginning your career, then continue for years as you progress through life toward your dream retirement.

Deciding To Pay Off Your Mortgage Early Is A Good Problem To Have. It Means You Can Afford To Do So.

Eventually, you’ll start to make more money at work, kick your adult children out of your house, or possibly even inherit some cash from a relative. When that happens, what should you do with the extra money you have?

You could save it for a new car, invest it in an IRA, give it to charity, or even a combination of these things. Additionally, you could choose to pay off your mortgage early.

Hopefully, you find yourself in such a fortunate situation at some point in your life. When that happens, you’ll have to make the decision on what you are going to do with extra cash.

There seems to be a direct relationship with money and opinions. For whatever reason, as you have more money, you will likely be exposed to an increase in opinions. Often, most of those opinions will come from those that are either unable or unwilling to follow their own advice.

It is always recommended that you seek the advice of professionals and experts prior to making significant decisions with your finances.

Any kind of a decision dealing with your mortgage should also be made after learning from professionals and experts in the personal finance world. As you receive the proper advice, it is also important to understand the pros and cons of paying off your mortgage early.

Pros Of Paying Your Mortgage Off Early

The most obvious reason some experts recommend paying off your mortgage early is the simple fact that by doing so, you eliminate what will likely be the largest debt you will ever carry.

If you pay off every other debt before your mortgage (a practice that many financial planning professionals suggest doing), you suddenly become completely debt free. Imagine, at that point, you wouldn’t owe anything to anybody.

For Many, There’s Nothing Like The Feeling Of Being DEBT FREE

Not having any form of debt also means having a significantly decreased level of risk.

In the financial world, these two things typically have a reciprocal relationship. For example, when you don’t have a mortgage or any other debts, losing your job is often more of an inconvenience than it is a crisis. If you consider yourself a more risk-averse person, this may be one of the biggest reasons you would pay off your mortgage early.  

A debt free life can also get you much closer to a life with a minimal amount of stress. One of the most common reasons that couples choose to get divorced is because of the stress created by their attempts at money management within their marriage. Without a mortgage payment, such money management can be greatly simplified.

Paying Off Your Mortgage Early Will Eventually Free Up Cash

Another one of the benefits of paying off your mortgage early is the increase in discretionary cash that accompanies doing so. Think of all the things you could do with your paycheck when the only payment you need to make is your utilities and taxes.

For example, you could invest far more for your retirement. You would be better able to invest up to the max in your IRA or 401(k). Another option would be to save it and purchase rental real estate in cash.

You could open a brokerage account that provides more liquidity than other investment option might. There are countless ways to invest for retirement and an increase in your discretionary income can create even more possibilities.

Additionally, you could use the extra money to do the things that you have been putting off because you couldn’t afford them before. You might travel more, buy a new car, help your kids with their financial goals, or remodel your house. More money means more options.

Paying Off A Home Early: Welcome To True Homeownership

One of the greatest benefits of paying off your mortgage early is true homeownership.

I have heard several people explain that their home felt different to them when they cut that last check to pay off their mortgage. There is a sense of accomplishment and a lack of anxiety that accompanies the reality that the bank can no longer take your house away from you. Paying off your mortgage early can make your house feel more like your home.

Lastly, if you choose to pay off your mortgage and later decide that you don’t like being out of debt for whatever reason, you could go get another mortgage on your home. Obviously, doing so would be much less likely than paying off your mortgage early would be, but it is still an option.

Should You Pay Off Your Mortgage Early

Cons Of Paying Your Mortgage Off Early

One of the reasons some experts say you shouldn’t pay off your mortgage early is so you can invest a greater amount of cash for a longer period of time. If you work to pay off your mortgage early, you won’t have as much money to invest.

Obviously, as you invest more over a longer period, your investment is more likely to grow much larger.

In this case, time can be your best friend. Choosing to pay off your mortgage before aggressively investing for your retirement reduces the time your investment has to increase.

After all, compound interest is only one of the wonders of the world when it is backed by a significant amount of time.  

Paying Off Your Mortgage Early May Cost You A Tax Deduction

Another of the potential downsides that accompanies paying off your mortgage early is that you lose a  tax deduction. In a nutshell, when you file your personal income tax return, you can either choose to itemize your deductions or take the standard deduction.

Since these are deductions that decrease your taxable income, you want whichever one you choose to be as large as possible. Thus, itemizing is only beneficial when the total deduction is larger than the standard deduction.

One of the items that counts toward your total itemized deduction is the amount of mortgage interest that you have paid in the given tax year. Obviously, when you pay your mortgage off early, you lose that potential portion of your itemized deduction.

The Standard Deduction Is Higher, So Fewer People Will Itemize

However, with the Tax Cuts and Jobs Act passed in December 2017, the standard deduction is now significantly larger than it was before. For single individuals, it is $12,000 and that amount is doubled for married couples.

Since the standard deduction is now so much higher than it has been in the past, it may not make sense to itemize. If that is true for your situation, you may not be missing out by not having any mortgage interest to deduct on your personal income tax return.

Further, neither the standard deduction nor your itemized deduction decreases the taxes you pay dollar for dollar. Instead, it decreases your taxable income. This means that for every dollar you spend in interest on your mortgage, you only save around a quarter in taxes, depending on your marginal tax bracket.

Most people would never choose to give up a dollar just to save a quarter on their taxes.

Since paying off your mortgage early can significantly affect your income tax filing, it may be best to consult your tax advisor on this matter.

Paying Off Your Mortgage Early Could May Not Be Wise If You Need The Extra Cash Now

Further, another reason you may choose not to pay off your mortgage early is that it requires you to give up a large amount of your hard-earned cash right now.

It’s not that you are spending that money and won’t ever see it again, but it does limit the way you can choose to spend the money you make. You may be required to give up vacations or new cars, jewelry or home remodels, or any combination of thousands of other things.  

Lastly, equity in your home is one of the most illiquid assets you can own. This means that if you ever need a pile of cash quickly, your home will not be able to provide that as well as savings, brokerage accounts, or even depreciable assets like cars and recreational vehicles can.

One of the only financially responsible ways to get the money back out of your home once you have it paid off is to sell it. If you don’t want to sell your home, you may need to find the cash from another source.

This can create a problem when your roof needs to be replaced, you lose your job and can’t find one for several months, or a medical emergency requires significant funding. Unless you can find a balance between saving and making extra mortgage payments, the illiquid equity in your home may not be as much of a blessing as it seems.  

So, Should You Pay Off Your Mortgage Early?

Paying off your mortgage early is a decision that each person or married couple should make for themselves. It is a decision that depends on your specific situation and the type of lifestyle you wish to have. What may make sense for your neighbor or family, may not be such a good idea for you.

Having the ability to pay off a mortgage early is its own accomplishment. However, such a fortunate financial situation requires a level of responsibility. Regardless of the decision you make, it will significantly affect your finances and the lifestyle you live.

About The Author:

Tom Madison is an educator and author and most recently published an ebook on Amazon titled “The Independent Retirement“. His fascination with personal finance began when his father introduced him to certificates of deposit and money market accounts when he was 11 years old.

Since then, Tom has spent thousands of hours learning everything he could dealing with personal finance. His experiences have made him a uniquely qualified expert in providing advice to those looking to properly handle their money. Tom’s Master’s degree in Accounting and Personal Finance has only added to his qualifications in this field. From Roth IRAs to health savings accounts and debt freedom to early retirement, Tom knows the little details that help everyday people create their financial independence.

You can order Tom’s book for free with Kindle Unlimited or $3.99 without it here!

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21 thoughts to “Should You Pay Off Your Mortgage Early?”

  1. There is a good balance in this post. It has pros and cons that people need to consider. The post is also not preaching one way to do this, rather, it is laying out a case that everyone’s financial situation is unique and only you can decide what is best.

  2. It’s not always about dollars and cents when you are considering paying off mortgage vs investing it.

    For the past decade, until recently you would have come out ahead by investing. If you did it this last quarter, you would have fallen way behind.

    The problem is it is easy to look back and see what could have been done, but going forward there is much uncertainty with investing vs paying off debt. With debt you have a guaranteed return with your dollars.

    I paid off my mortgage and became debt free and it was the best thing I did for myself financially. There is financial peace of mind that trumps any monetary difference I COULD have made in the market (depending on how I timed it).

    1. XRAY! Always a pleasure to see you here. So happy to hear that paying off your mortgage was the best thing you did for yourself financially!

    2. So excited for you! We are hoping to pay off our mortgage this April. In the end it came down to wanting peace, more options and freedom. I don’t think we will regret it and when the house is paid off we’ll be able to save/invest like never before.

  3. Thank you for this. I am 48 and my husband is 60. My husband has police retirement (which isn’t what you would think) and Social Security coming up. We have figured up that my husband will make equal to or more with those two sources of income than he has actually being a police officer.
    I am self employed and we also own a small roofing company. We have not increased our lifestyle much over the years as our income has grown. Right now we are focused on paying off the mortgage and i am on the fence to if I will pay the $5500. on my IRA. 7 years ago combined we did not make over $50,000 a year. In that time we have paid off all debts but the house, reduced our mortgage this year by $40K, and have saved about $90,000. I have an IRA with $100,000.
    What sealed the deal for me to pay off the mortgage is that I asked my parents (who have not made good choices) if they would rather have the money in the bank or have the mortgage free and both (they are divorced) said if they had to do it all over again they would not have a mortgage payment in retirement.

    Thanks for the article. I love your work.

    1. Thanks for sharing some of your story! It sounds like you guys have a solid plan, and we are glad you have been so thoughtful with your financial decision-making!

  4. I really liked this article! Thank you for always covering thought provoking topics. It really helps my husband and I have thoughtful conversations about personal finance and planning for retirement.

  5. Great article covering both the pros & cons Tom. I know folks that have paid off their mortgage and they say it is the “psychological” appeal that makes them happy. However, if you have a very low interest rate (ours is below 3.5%) it really doesn’t make much sense in paying off your mortgage WRT building wealth.

    You could save/invest the money and pay off your mortgage “at any time” using those funds in the future. Your Roth IRA principal can be used penalty free (not the investment growth, just the principal). That’s piece of mind as well. Also, you’ll likely have a higher net worth over time as suggested by Ric Edelman’s article mentioned in the comments above. There are numerous articles that support Edelman’s conclusions.

    I believe everyone needs to do the math to make the best decision for his/her situation. Knowing you have the funds to pay off your mortgage is comforting. Using OPM (other peoples money, the mortgage company’s money) to make more money is also comforting as well as financially rewarding. In addition, take into consideration it is unlikely we’ll ever see mortgage rates this low anytime in the future.

    FYI – several years ago, we were aggressively paying off our mortgage until we took a deep dive into the math after researching the topic a bunch. We do make extra mortgage payments every year to reduce the total interest we’ll pay over time, but first we max out our Roth IRA and other investment accounts. We’ll contribute the max to our 2019 Roth IRA this month (January 2019) to optimize our return over time (pay yourself first).

    Again, thanks for the post – very helpful.

    1. Hey Greg! Thanks so much for reading and for such a thoughtful comment. Totally agree with you and we employ a similar numbers-first strategy. However, as you mention, the psychological impact for some people of being debt free is tremendous, so you can’t fault them either.

      1. You bet Tom!
        Either way you go you’re a winner. In addition to the positive psychological impact, those that pay off his/her mortgage early are definitely winners. They’ll save tens of thousands in interest payments over time.

        Those that save/invest the money are big winners too. They’ll have more “liquid” funds (no cost/interest) for unexpected life events. It can be expensive to access home equity without selling the asset/home as you pointed out in your post.

        It’s not an easy or straight forward decision for sure. After a lot of research, we decided to do a little of both. We pay extra on the mortgage every year (saving thousands in interest over time) and we have built up our investment/retirement accounts. We now have enough saved/invested to pay our mortgage for years with no additional cost to us. We have a portion of those funds parked in online savings accounts (i.e., Barclay’s, Discover, etc.) and they are growing at 2.2% interest (no market risk). We were also able to increase our retirement account contributions to lower our taxes as our income increased over time (i.e., SEP, Solo 401(k)). Note these funds are not as liquid, but the money we saved in taxes is.

        Lots of variables to consider and I totally agree the way to go depends on everyone’s own personal situation as you pointed out. Again, great content for consideration. Thanks.

  6. Ah, I’m glad I found this article. I’ve got a post scheduled for mid-March that goes through options in either paying off the mortgage early or not, with numbers. I embedded a poll to see what people think.

    I was half expecting the option to put 100% into index funds to outperform the paying off mortgage early option. But, the math actually appears to lean towards paying off the mortgage early, especially if we sell the house in 10 years, downgrade and put the remaining money in index funds. The numbers are very interesting to compare. I would be interested in hearing your thoughts on what you think we should do, after reading this article.

  7. This is one of my favorite topics to debate. For years we were going down the path of investing instead of paying off the mortgage. We had a few life experiences that made us realize that living mortgage free is the best route. We made our final mortgage payment on August 6 and I wouldn’t have done anything differently. Thanks for sharing your perspective.

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