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Paying off your mortgage and owning your home free and clear is a dream for many homeowners. After years of making monthly payments, being mortgage-free may sound like paradise. But is having your house fully paid off all it’s cracked up to be? There are several pros and cons to weigh when deciding if paying off your home early is the right move.
Benefits of Paying Off Your Mortgage
While you’ll lose some tax benefits that come with a mortgage, paying off your home early has some compelling financial upsides:
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You’ll save a ton on interest. Interest makes up a huge chunk of your total mortgage payments. Paying off your 30-year loan early could save you tens of thousands in interest charges.
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Your monthly expenses will plummet. You have more money in your pocket now that you don’t have to pay a mortgage. For most, it’s their single biggest monthly bill. That extra money can be saved or paid off other debts.
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Your home is a risk-free investment. Your home is like a forced savings account because of all the equity you own in it. Not a single bank owns a piece of it that they could charge off.
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You won’t risk foreclosure if times get tough. If you don’t owe monthly payments, losing your job won’t put your home at risk. This gives you a lot of financial security.
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Your net worth will grow. Paying down the mortgage raises your equity and wealth, especially if the value of your home goes up. Your home may become your most valuable asset.
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You can tap home equity if needed With the mortgage paid, lines of credit and home equity loans allow you to access your equity for big expenses later
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You’re guaranteed a return on your money. Paying extra principal is like earning an interest rate equal to your mortgage rate, risk-free. That may beat returns on other options.
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It maximizes estate planning benefits. Passing on a paid off asset to your heirs avoids them inheriting a mortgage liability.
Drawbacks of Paying Off a Mortgage Early
Paying off your home faster certainly has advantages. But depending on your situation, it also comes with some potential downsides:
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You lose tax deductions. If you itemize, mortgage interest is usually a large write-off. Your tax bill could rise once it’s gone.
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You may miss out on better investment returns. Money you put toward extra principal could earn more in the stock market over time in many cases.
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It ties up money in your home. Paying off the mortgage leaves you less liquid. Those funds can’t be as easily accessed later if needed.
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Rates may drop in the future. You could potentially refinance for an even lower rate later, making the payoff pointless.
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You still have ownership costs. Property taxes, insurance, maintenance and repairs still have to be paid even without a mortgage.
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It could limit your borrowing power. Having little mortgage debt may hurt your ability to qualify for future loans or lines of credit.
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Low rates diminish the urgency. Today’s ultra-low rates may make paying off your mortgage in a hurry less beneficial.
Is Your Situation Right for Paying Off a Mortgage Early?
Whether paying off your home faster is smart depends on your unique situation. It makes the most sense when:
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You have a high mortgage rate. The higher your interest rate, the more worthwhile it is to pay off the loan early.
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You don’t need write-offs from the interest deduction. If you don’t itemize taxes, you won’t miss this benefit.
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Your home is your largest investment. Payoff protects your biggest asset and wealth builder.
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You have other money saved. Don’t pay extra if you lack emergency savings and retirement funds.
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You value peace of mind over returns. Guaranteed savings from paying off a mortgage can outweigh probable investment gains.
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You’re close to retirement. Payoff can maximize estate planning and reduce expenses as a retiree.
Other Pros of Owning a Paid Off Home
Aside from the major financial upsides, being mortgage-free comes with other benefits:
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More disposable income. With no monthly mortgage, you’ll have more room in your budget for vacations, hobbies, going out, etc.
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Increased happiness. Financial security and freedom that comes with outright ownership can do wonders for your stress.
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Flexibility to move or downsize. Options open up for relocating or downsizing without the burden of your current mortgage.
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Ability to help family financially. Extra savings from no mortgage makes it easier to assist kids, parents or grandparents if needed.
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Peace of mind. Pride and comfort come with owning your home free and clear after years of payments.
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Motivation to pay off other debts. Knocking out the mortgage inspires paying off vehicles, credit cards and student loans faster.
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More funds to invest. With your largest debt gone, you can put more money into stocks, bonds, retirement plans, etc.
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One less bill to keep track of. Life gets simpler without a huge monthly mortgage payment to budget for.
Is Your Mortgage Already Low?
Today’s ultra-low rates can make paying off a mortgage early less advantageous. With a sub-3% mortgage, your money might be better directed elsewhere.
Paying off a low-rate loan means you:
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Give up inexpensive financing that may not be available later.
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Reduce liquidity with less cash on hand.
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Potentially miss out on higher returns from investing.
If your rate is already low, consider just making regular payments. Then use extra funds in ways that may beat the mortgage interest savings.
Do You Ever Regret Paying Off Your Home?
For most who pay off their mortgage early, there are few regrets. The pros tend to heavily outweigh the cons.
But it’s possible to have misgivings in certain situations:
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If you tie up a large portion of your net worth in home equity.
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When better investment returns emerge that you missed out on.
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If you lose your income source and remaining equity can’t cover expenses.
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When major new expenses arise without accessible equity to tap.
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If you move soon after and didn’t recoup the payoff costs.
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When mortgage rates fall and you can no longer refinance lower.
However, if you pay off strategically and have adequate savings, outright ownership with no regrets is achievable for most.
Alternatives to Paying Off Your Home Quickly
If paying off your mortgage fast doesn’t make sense for you right now, consider these options instead:
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Make just the regular principal and interest payments. Avoid extra payments to pay down your mortgage faster.
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Refinance your mortgage if rates drop significantly. You can lower your interest costs without tying up capital.
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Pay off higher interest debts first. Credit cards, personal loans and autos often have higher rates than mortgages.
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Invest extra money instead. Earning returns in the market may beat mortgage interest savings.
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Build up your liquid emergency fund. Don’t pay extra on a mortgage until you have a solid rainy day fund.
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Fund your retirement accounts. Don’t neglect long-term savings in favor of paying off your home early.
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Use extra cash for other goals. You may have higher priorities than your mortgage, like college or travel.
The Final Word on Paying Off Your Home
Paying off your mortgage faster certainly has its benefits. But it also involves tradeoffs. Take a close look at your entire financial picture to decide if it aligns with your situation and goals. If the numbers pencil out, a paid off home can provide security, savings and peace of mind. But don’t pursue payoff so single-mindedly that you jeopardize other important areas of your finances. Find the right balance and payoff approach for your needs.
Can you pay off your mortgage early?
The short answer is yes — you can pay off your mortgage early. This is referred to as prepaying a mortgage.
Most mortgages don’t come with a prepayment penalty, so you can make extra payments or pay off the loan in full at any time without incurring a fee.
Again, most loans don’t include this fee. If you’re not sure, look at page one of your closing disclosure or your mortgage note for a section that talks about the “right to prepay.” ” Alternatively, you can ask your mortgage servicer.
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- When you pay off your mortgage early, you may feel safer and have more budgeting freedom.
- When you pay off your mortgage, you lock up your money in your home. You won’t be able to get to it until you sell the house, get a second mortgage, or do a cash-out refinance.
- If you have extra money that you could use to pay off your mortgage faster, think about where that money would be best spent.
Shedding your mortgage early sounds freeing, but the amount you save in interest might be less than you’d earn if you put those funds to work elsewhere.
Here’s what to consider before committing to paying your mortgage off early.
We’re Paying Off Our House Tomorrow, What Now?
FAQ
Is it a good idea to fully pay off your home?
You shouldn’t pay off your house right away if you want to get the most out of your investment. It might be better for you to pay off your debt if you just want peace of mind or if your interest rate is so high that you can’t make more money by investing.
Is it better to have no mortgage?
The lack of a mortgage doesn’t make your home a better investment, or somehow build your equity better. The value of your home is that you live in it, and it’s yours, mortgage or not. Sure, you might like to be done with the mortgage payments, but that’s not a reason to speed things up.
What does Suze Orman say about paying off your house?
Even though losing your job can make you panic about money, Orman says you shouldn’t use all your savings to pay off your mortgage early. Even if you have enough money saved to wipe out your mortgage, don’t pull the emergency cord until absolutely necessary.
Does life change after paying off a mortgage?
- 1. Freed Up Money Each Month for Other Things
- 2. Increased Our Peace of Mind Dealing With a Fluctuating Income
- 3. Convinced Us We Could Afford More
- 4. Reduced Our Net Worth
- 5. Lowered Our Minimum Monthly Expenses