Is it smart to pay off your mortgage early?

There are many pros and cons to paying off your mortgage early, and it can be a difficult decision to make. In this article we weigh the benefits and drawbacks of an early mortgage payoff, outlining the circumstances in which either decision can be beneficial.

There is no right or wrong answer here. Our advice will always be to assess what your goals are.

Some people are more comfortable with debt, and utilize that debt to make more investments and produce cash flow.

Other people might prefer to have no payment. This allows people to have less worry and live stress-free.

While there are pros and cons to each choice, we have one recommendation: if your mortgage rate is greater than the potential earnings of another investment, we suggest you pay down the debt.

How to pay off a mortgage earlier than your term

You can apply more money towards your principal payment which will accelerate your pay-off schedule, a.k.a your amortization schedule.

Make sure you let your mortgage company know that you want to apply the excess to your principal.

What are the drawbacks of an early mortgage payoff?

You lose liquidity paying off your mortgage.

• Liquidity refers to how easy it is to access and spend the money you have. You’ll be putting money into your home, a solid asset, which will require some hoops and dings to get the money back out to be usable when you need it.

You lose access to tax deductions on interest payments.

• Property owners get tax benefits based on how much they pay in interest into their mortgage, if you choose to pay off your mortgage early, you’ll lose these tax benefits.

You could get a small knock on your credit score.

• While this isn’t a substantial hit, your credit score is partially based off of the diversity of credit types you service. If you pay off your mortgage, it’ll no longer be present in your credit report, and you’ll notice a small score decrease.

You cannot put the money towards other investments.

• This one boils down to opportunity cost. If you choose to put money into your home above and beyond your monthly payment, you’re losing the opportunity to invest that money elsewhere. Make sure to analyze whether the money you’ll save over the course of your mortgage is greater than the potential money you could make investing in other avenues.

What are the benefits of paying off your mortgage early?

It will eliminate your monthly mortgage payment, freeing up extra funds for use in retirement.

• If you’re close to retirement and don’t want to worry about servicing your monthly payments, paying off your mortgage while you’re still working can be a solid idea.

It can potentially save you thousands of dollars in interest.

• If you’ve got the extra money to put into your mortgage principal, and aren’t too jazzed about other investment opportunities, paying your mortgage off early can be a very low risk way to save a substantial amount of money over time.

Early repayment offers a predictable rate of return, equivalent to the interest rate on the balance you're paying off.

• Many forms of investing have inherent risk, while paying off your mortgage is guaranteed to have the expected return proportional to your interest rate.

It can provide peace of mind knowing you own your home outright.

• Many people are simply interested with owning their home, and have that as their primary goal. If this is what’s important to you, it can provide a lot of satisfaction and peace of mind.