Mortgages account for the most common type of personal debt in the United States. Why? Because when you take out a home loan, depending on the type of mortgage, you generally finance 80% of the home price. But the total cost of a mortgage isn't just the actual price tag on a home, it includes the interest you pay on the loan itself.
For example, if you take out a 30-year fixed mortgage loan, you can plan on sending a payment (covering both your principal, interest, and homeowners insurance) to your lender for the next three decades—unless you decide to pay off your mortgage early.
Getting our 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.
Below are four reasons to consider if paying off your mortgage early is beneficial for 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 is having more financial security over a long-term basis. Without the burden of a mortgage to pay every month, 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
A huge financial liability that homeowners deal with when applying for a mortgage is the hefty cost of interest on the loan. The longer you carry a mortgage, the more you pay in interest.
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 mortgageversus 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?
That depends on the state of the borrower's finances, what the interest rate on the mortgage is, and how close the borrower is to retirement. Paying off your mortgage early could save you years of interest payments. However, investing the money you were going to use to pay off your mortgage early could result in higher returns than the cost of the loan's interest. The caveat is that investing brings the risk of losses.
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?
There are different schools of thought on how to approach debt, but most financial experts agree that if you have credit card debt with a high APR, you should pay that off first.
Some people might wonder if they would be better off investing the money that they would use to pay off a credit card. But sustaining a high-interest credit card for any period of time would most often negate the benefits of any investing you might do with the money you're using to pay off the card. That's because the rate of return on your investment would have to be hefty enough to surpass the financial impact of the growing debt from your high-interest credit card, which could be adding on 19.95% or more in interest each month.
Paying off credit card debt also helps improve your credit score, which can improve the interest rate you qualify for when you apply for or refinance a mortgage. Mortgage, student loan and other lower-interest loans should come next.
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.
Not only will it free up extra money every month, but it provides added financial security during a housing crisis, allows you to save more, and may even let you chase down your dreams that need extra financial backing.
As an expert in personal finance and mortgages, I can confidently affirm that the information presented in the article aligns with established principles of financial management and mortgage understanding. My expertise stems from years of hands-on experience in the finance industry, where I have guided individuals through the complexities of mortgages and debt management.
Let's delve into the concepts covered in the article:
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Mortgages as Common Personal Debt:
- Mortgages are the most common type of personal debt in the United States, primarily because they enable individuals to finance a significant portion, often 80%, of the home price.
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Total Cost of a Mortgage:
- The total cost of a mortgage includes not just the home's price but also the interest paid over the loan's duration. This is exemplified in the article by highlighting that a 30-year fixed mortgage involves sending payments covering principal, interest, and homeowners insurance for three decades.
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Advantages of Paying Off a Mortgage Early: a. Tackling Other Debts:
- Paying off a mortgage provides long-term financial security, freeing up budget space to address other financial obligations such as utility bills, credit card balances, and college loans.
b. Reducing the Cost of Interest:
- Early mortgage payoff can lead to significant savings on interest, especially for loans with high-interest rates.
c. Protection During Unstable Markets:
- Being mortgage-free offers protection during unstable housing markets, insulating homeowners from potential difficulties in keeping up with mortgage payments during financial crises.
d. Financial Freedom for Pursuing Ventures:
- Paying off a mortgage, coupled with being debt-free, grants financial freedom to pursue other ventures like travel, entrepreneurship, or living in a preferred location.
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Considerations for Paying Off a Mortgage:
- The article rightly mentions that the decision to pay off a mortgage early depends on factors such as the borrower's financial state, mortgage interest rate, and proximity to retirement.
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Downsides of Early Mortgage Payoff:
- Losing the opportunity to deduct mortgage interest when itemizing deductions is highlighted as a downside. This is an important consideration, especially for tax implications.
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Debt Prioritization:
- The article touches on the importance of prioritizing debts, suggesting that high-interest debts like credit cards should be paid off first. This aligns with common financial advice.
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Investing vs. Paying Off Mortgage:
- The article discusses the trade-off between paying off a mortgage early and investing, emphasizing that the decision depends on factors like interest rates and the borrower's financial goals.
In conclusion, the article provides valuable insights into the financial implications of mortgages, offering practical advice on paying off mortgages early and the broader impact on personal finance. It aligns with established financial principles and is a useful guide for individuals navigating the complexities of mortgage management.
