If you are in the position where you can pay off your mortgage early, congratulations; it’s a good place to be. However, you may be wondering if doing so is the best financial decision for your particular situation. Are there better ways you could spend your money to help secure your future? Let’s take a closer look at the benefits and drawbacks of paying off your mortgage early.
Benefits of paying off your mortgage
The first benefit is that you will pay less interest on your mortgage, so your house will cost you less in the long run. For example, if you take out a loan for $160,000 at a 4% interest rate and pay it off over 30 years, you will pay approximately $114,991 in interest. If you pay it off after 15 years, you are looking at $53,030 in interest. That’s a savings of just over $61,000.
Another benefit is that, once your house is paid off, you no longer have to make monthly payments, which will lower your expenses in retirement.
Lastly, there is the peace of mind that comes with your mortgage being paid in full; you will no longer have a large debt in your name and you’ll have equity in your home if you ever need it.
Drawbacks of paying off your mortgage
Firstly, you will lose the mortgage interest tax deduction, so you should calculate how much that will cost you each year. Keep in mind that, towards the end of your loan, the interest declines as the principal increases, so that benefit is going to gradually decrease anyways.
Another issue to consider is that you lose liquidity, as The Center for Retirement Research at Boston College says in their brief on ‘Should You Carry a Mortgage into Retirement‘. Once you pay off your mortgage, you have equity in your home, but no available cash on hand. It’s worth considering the possibility that another investment may earn a higher ROI.
For instance, if you can earn more from risk-free investments like treasury bills and bank certificates than you will save by paying off your mortgage, it would be more beneficial. Another route is to invest in the stock market, which can produce higher returns, but also presents a higher risk. Be sure to explore the options and weigh the risks against the returns.
The next issue to consider is that some mortgages have prepayment fees attached to them. As per Chase, a prepayment fee is charged for paying off your loan ahead of schedule and may be charged if you make a payment that exceeds your scheduled amount. Be sure to check if your loan has any prepayment fees, as they will be deducted from your interest savings.
It’s also important to consider the impact on your credit. According to Experian, your credit score is impacted by your payment history, credit utilization ratio, the types of credit used and how long you’ve been using credit. By having an ongoing mortgage payment, you are building your credit profile and showing borrowers that you manage debt well. This can help you to get approved to borrow more money in the future.
How to decide
With these pros and cons in mind, how do you make the decision to pay off your mortgage or not?
- Pull up a paying off mortgage loan calculator to find out how much you will save in interest and check if your loan has prepayment penalties.
- Consider how much it will cost you each year if you lose the mortgage interest tax deduction.
- Consider the benefits of having a house paid in full.
- Beyond that, consider the investment opportunities you have. Will risk-free investments earn you more than the interest you will save, or do you want to take a higher risk route and invest in the stock market? If you need help, you can look up a mortgage payoff vs. invest calculator.
If you are going to save far more interest than you think you can earn investing and don’t have a prepayment penalty, it makes the most sense to pay off your mortgage. If you are savvy with investments and confident that you can make more money by keeping it liquid, investing may be a better option.
Another option that could offer the best of both worlds is to refinance your mortgage for a shorter period. For example, if you have a 30-year mortgage, you could refinance it for 15-years cutting down on your interest. In doing so, you could still invest a portion of your money into stocks or bonds while getting the credit benefits of having a mortgage. If you take this route, you’ll need to review and compare lenders to find which one can offer you the best deal.
Every situation is different, so you’ll have to consider every factor. In the above-mentioned brief from The Center for Retirement Research at Boston College, they came to the conclusion that, in most cases, the mortgage payoff option is the best bet.
Process of paying off your mortgage
How do you pay off your mortgage?
First, you should contact your loan company and request a payoff quote. They will typically deliver it within one week and will provide you with an expiration date for the quote. If the amount is not paid by the expiration date, interest will continue to accrue. If paid in full, you can request the release of the mortgage lien from your title.
Then, you will own 100% of your home.
If you are in the position to pay off your mortgage, it is a critical time that can determine your quality of life in the years to come. Owning your home is liberating. You no longer have to pay each month for housing and you’ll have a large asset to borrow against if the need ever arises. However, for some people, maintaining the mortgage payment will help to improve their investment portfolio and create more wealth in the future. Weigh the pros and cons to find what’s best for your unique situation.