The Pros and Cons of Paying off Your Mortgage Early

Considering paying off your mortgage early? You’d be joining the almost 30 percent of Americans who own their homes free and clear. So how do you know if this is the right move for you? As with everything, there are pros and cons to consider. Here’s what to know about the penalties and benefits of paying off your mortgage early.

The Cons of Paying Off Your Mortgage Early

1. The investment might not be your most profitable.

Over time, the return on stocks is usually somewhere around 10 percent. If the interest on your mortgage is 4 percent, does it really make sense to lose out on the money you could potentially gain by putting that money in the stock market instead? Of course, investment returns vary. There’s no way you can predict with certainty what the stock market will do. But know that some investments may be wiser than paying off your mortgage early.

2. Valuable tax deductions will be lost.

Once your home is paid off, you’ll no longer be able to deduct mortgage interest on your tax returns. Plus, you’ll likely have at least 10 years of increased monthly payments in order to own your home outright.

3. Investments in real estate can be constraining.

What happens if you need money, and fast? Real estate is often considered safer than stocks, but if the worst happens and you need a significant amount of cash, stocks are easier to convert to spendable money. The alternative could mean selling your property or taking out a home equity loan (which puts you right back where you started). And if you happen to become unemployed, taking out a loan against your home could be extremely difficult.

4. Other debt payments might be more important.

Take into account other debts you have. If you have higher-interest debt or your savings account is looking slim, consider tackling those issues before you start worrying about paying off your mortgage early. You could pay it off in 15 years — or you could use those 15 years to be saving and investing. Explore your options carefully before making a decision.

The Pros of Paying Off Your Mortgage Early

1. You’ll have one less recurring expense to worry about.

There are many benefits to paying off your mortgage early. If you pay your home off before you retire, it’s one less expense you’ll have to worry about when you’re living on a fixed income. This will allow you to put more money into your savings or investment accounts.

2. You can contribute to increasing your home’s value.

Paying off your mortgage early lets you build equity in your home. As long as you set each additional payment to the principal, the extra amount will help increase the value of your home.

3. You can live debt free.

Who doesn’t dream of living debt-free? If you pay off your mortgage, early you OWN your home. Paying off the full mortgage, along with the interest, opens up the possibilities of what to do when you're debt-free.

How to Pay Off Your Mortgage Earlier and Faster

Make biweekly payments.

Instead of paying your mortgage just once a month, you can make half payments every two weeks. Why? A biweekly payment schedule means making 13 full mortgage payments in a year instead of the usual 12.

Refinance your loan.

If you refinance your mortgage with a shorter term (say, 15 years instead of 30), you’ll be able to pay off your mortgage that much faster. Bonus: Shorter-term loans typically mean lower interest rates, so your payments may not be as much as you’d expect (i.e., not double the amount you pay monthly on a 30-year loan).

Pay extra toward your principal.

This is probably the most obvious option, but you’ll want to be sure any extra money you pay is actually going toward your principal, not just your interest. Many lenders allow you to make an extra payment and mark it as “principal only.”

Protecting Your World

You don’t have to navigate tough financial decisions on your own. Whether you’re considering paying off your mortgage early or buying a second home, your local Farm Bureau agent can help you realize your goals.