There are many choices to make in homeownership. Where should you buy a house? What mortgage loan should you use? How much of your income should go towards a mortgage payment?
When you finally do secure a home, another question will arise: When should I pay off the mortgage?
There are many arguments for and against paying off the mortgage, but we’ll try to sort through the clutter so you can make the right choice for your financial future.
Note: We are Not Financial Advisors
This article is intended as a general discussion. We are not financial nor retirement experts, and this article should not be considered financial advice of any kind. Before making any choices on your future spending, be sure to speak with a qualified expert.
Pros and Cons to Paying Off a Mortgage Early
Pros of Paying Off the Mortgage
When you pay off the mortgage, you’ll enjoy some excellent benefits that help support your lifestyle while also creating a solid financial future.
No Payments!
The biggest advantage, one that is so obvious it’s almost not discussed, is that when you pay off the mortgage, you no longer have monthly payments. There are many different statistics and percentages, but most people in the industry recommend that your mortgage payment should be roughly 25% or less of your take-home pay. If we assume that most Americans stick to this policy, we can say that when you pay off the mortgage, you are regaining a quarter of your income.
Whatever the total, having no payments means you have more money for investments, leisure, entertainment, inheritances, and charitable donations. It’s easier to save for large lifestyle purchases like a new boat or remodeling project. Imagine what you might do if you did not have to pay for your monthly mortgage.
The Money is Not Lost
Some are hesitant to pay off the mortgage with a large savings because they feel as if the money is being lost. But you don’t actually lose anything when you pay off the mortgage, you simply transfer the cash from your bank account or investment fund and place it into the home.
Secure, Stable Future
The dot-com crash. The 2008 recession. The COVID pandemic. You simply never know what the future might hold. But when you have a home that is totally paid for, you’ll be more likely to weather through a variety of financial storms. Losing a job and seeing a stock portfolio gutted is never easy, but if you have no mortgage payment it can be a lot less stressful.
Cons of Paying Off Mortgage Early
Paying off the mortgage early is a clear tradeoff. There are positives, but there are clear negatives as well.
Reduced Liquidity and Available Cash
When you pay off your mortgage, the money has to come from somewhere. Usually that means taking a large chunk of your savings account and using it to pay off the loan. Wherever it came from, you’ll have less money available for random or planned expenses. This can mean no money for the boat you’ve always wanted or the bathroom you’ve been meaning to remodel. Or it can mean a financial struggle if a major emergency arises, such as medical bills or major home repairs.
Missed Investment Opportunity
Some financial gurus recommend not paying off the mortgage and, instead, using the money you would have put towards the home and investing it. This makes sense, as you can often get better returns from a solid investment account than the interest you would avoid paying if you paid off the mortgage.
When is it a Good Idea to Pay off the Mortgage Early?
Like most financial decisions, the final choice often depends on your specific situation. But there are a few unique situations that indicate you may be ready to pay off the mortgage.
When You Have the Cash or Can Afford Additional Payment
To pay off the mortgage, you actually have to have the cash. You need either a significant savings that can eliminate the monthly payments, or you need to be able to afford a larger payment, one that covers the regular mortgage plus a bit more.
You should never borrow money to pay off your debt. Even the financial advisors who claim that paying off the mortgage is always the best route would not recommend borrowing money to do so. All that would accomplish is moving debts from one place to another, and you’ll almost certainly be stuck with a larger interest rate if you pay off the mortgage using funds from another loan.
When You Have no Other Debts
In most cases, the mortgage should be the last debt to pay off. If you have other debts, such as credit card debt and auto loans, it’s probably best to pay these off first and then move towards paying off the home. However, if you are currently free and clear of other debts, and can afford to do so, it may be wise to eliminate your mortgage payment.
Boston College Study: Most People Should Pay Off Mortgage
According to a study completed by the Center for Retirement Research at Boston College, most households are better off when they complete the mortgage before or shortly after retiring.
The article addresses the argument that houses should not pay off the mortgage and should instead maintain capital for emergencies. But they claim that people keeping a mortgage should consider “how they would maintain their mortgage payments once their financial assets had been spent.”
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