Saturday May 27, 2017

Pros and Cons Of Paying Off Your Mortgage Early

On first glance, the question of whether or not to pay off your mortgage early may seem obvious—in either direction.  Or is it?  There are a lot of reasons to consider doing it either way, regardless of how clear the issue may seem to you initially.

Odds are you’ll probably end up going the way of your instincts anyway, but here are some concrete advantages and disadvantages to paying off your mortgage early.

Pros of paying off your mortgage early:

  1. Paying off debts is a good thing.  You’ll have more peace of mind knowing you don’t owe money, and you’ll also actually own your house if you manage to pay off the mortgage in full.  You won’t have that uncertain feeling of borrowing anymore, and you’ll probably sleep better at night. 
  2. Paying off what you owe early means increased equity in your home.  If you need cash later, you may be able to get a bigger reverse mortgage.  Reverse mortgages take care of many homeowners for life.
  3. You won’t need to pay for mortgage insurance anymore, and you won’t owe interest.  This can add up to quite a hefty sum of money after a few years have gone by.  It is a finite sum of money though (unless you’re trying to navigate around an adjustable interest rate; then maybe not).

Pros to paying off your mortgage slowly:

  1. If you hold onto your mortgage, you actually receive a tax benefit in the form of deductions, but only if itemizing your deductions exceed your standard deduction.  Otherwise there’s no tax benefit.  The tax benefit also decreases as the years go by, so this advantage to keeping your mortgage shrinks with time.
  2. If you don’t have enough cash on hand for short term needs, you may also not want to pay off your mortgage early, because that will deplete your savings, which will leave you with nothing left over for emergencies.

    Of course, actually owning your home could prevent homelessness in the future, so it could swing either way.  Other emergencies are possible as well though, for example emergencies relating to health.  In these cases, having some cash handy can be of benefit.
  3. Paying off your mortgage slowly might increase the potential for more money in the long term, depending on your investment skills.  There are a lot of places you can put your money other than into your house which could technically pay off a lot more in the long run.

    Especially when you’re young, you have a great opportunity to invest your money and generate a tremendous sum over the course of your lifetime.  If you are busy paying off your house though, you won’t necessarily get that chance till later, so this is something to think about, especially if you are skilled with investments.

So, should you pay off your mortgage early or not?  As you can see, there is no right or wrong answer to this question.

It comes down to you.  What do you want from your life now and in the future, and what do you need the most?  What kind of security to you value—liquid cash or real property?  Do you plan to invest?  Your answer could also change with time, so re-evaluate your needs and your goals each year and see if your answer is still the same.


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