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A mortgage loan to finance buying a home is often the largest purchase most people make in their lifetime. A mortgage comes with years of monthly payments and interest that inflates the cost of the home to well beyond the purchase price. Paying off your mortgage early offers several benefits, including saving thousands of dollars in interest and providing the financial security and freedom of owning your home outright.
Paying off a mortgage early also allows you to pay down other debts, which can help provide relief in your monthly budget. 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. Discover four reasons why paying off your mortgage early can benefit 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 includes the long-term financial security. Without the burden of a monthly mortgage payment, 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
When you take out a home loan the mortgage lender will generally lend 80% of the home’s price, depending on the type of mortgage. However, the total cost of a mortgage isn’t just the actual price tag on a home, it includes the hefty cost of interest on the loan. The longer you carry a mortgage, the more you pay in interest.
For example, if you take out a 30-year fixed mortgage loan, you can plan on sending a payment (covering principal, interest, and homeowners insurance) to your mortgage lender for the next three decades.
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 mortgage versus 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?
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?
Although there are various debt-reducing strategies, if you have credit card debt with a high annual percentage rate (APR), you might want to pay it off first, followed by lower-interest loans like mortgages and student loans. Also, paying off credit card debt can improve your credit score and the interest rate on a mortgage.
Some might consider investing the money that they would use to pay off a credit card, but the cost of the card’s high interest rate for any period of time would most often negate the investment gains. The rate of return on your investment would need to surpass the financial impact of the growing debt from your high-interest credit card, which could cost 19.95%.
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.
Paying off your mortgage can free up extra money every month and provide added financial security during a crisis, allowing you to save more. It may even let you chase down your dreams that need extra financial backing.
