I think there are a lot of great reasons for paying the mortgage off early, but it really comes down to your financial goals. If you have another need that is more important, such as saving for college, weddings, or building up your retirement account, it might be better to keep the mortgage for now. However, if you’re in good shape financially and don’t have any other pressing savings needs, I highly recommend paying your mortgage off early for several important reasons.
- Debt equals risk. If you’re carrying a large amount of debt, you’re risking financial hardship if your income is reduced or lost altogether. Paying your mortgage off early probably means eliminating your biggest monthly expense, which greatly reduces your financial risk. If you didn’t have a mortgage payment, how stressed out would you need to be if you lost your job?
- Finance charges are expensive. Banks occupy the tallest towers in America’s major cities for a reason: lending money over long periods of time is very lucrative. A $250,000 30-year fixed mortgage at 5% racks up around $233,000 in interest over the life of the loan. Why not keep some of that hard-earned wealth in your pocket instead of sending it to the bank by paying the mortgage off early?
- Eliminating debt equals financial freedom. Think of what you could do if you didn’t have that $1,000 or $1,500 (or more!) monthly mortgage payment. How quickly could you save up for a new car or the vacation of your dreams? How quickly could you build up a nice retirement nest egg? How much easier would it be to realize a dream of starting your own business? How stressed would you need to be if you had to endure a few lean months or years before you got your new business off the ground?
- Paying your mortgage off early is a good retirement strategy. I’m not a financial planner, but it makes sense to me to eliminate debt before you enter retirement. A lot of people think only in terms of savings and what kind of income they can generate from their savings when planning for retirement. But what about clearing debt? With no mortgage payment, how much further will you be able to stretch your retirement dollars?
The following are some arguments I commonly hear for keeping a mortgage, one of which is ridiculous and the other valid in certain circumstances depending on financial goals.
- I’ll lose my mortgage tax deduction by paying my mortgage off early. This is one of the most ridiculous reasons peddled out there for keeping a mortgage. Considering how complex the tax code is, there might be a tiny minority of people that really do need to keep the mortgage as a write-off, but I think the vast majority of homeowners are far better off paying off their mortgage early even if it means losing the tax deduction. The tax deduction saves you if you must have a mortgage, but keeping it just for the sake of the tax deduction is like paying a dollar to get back thirty cents. It just doesn’t make sense (or cents!). For more information, see my post called Should You Keep Your Mortgage to Get the Tax Deduction?
- I want to invest my cash instead of using it for paying my mortgage off early. This can be a legitimate argument for keeping a mortgage, but only if you expect to earn more from your investments than it costs you to keep your mortgage. The advantage of paying off your mortgage is that you can calculate and be certain of your actual return on investment, whereas it’s often highly uncertain what you’ll earn in the financial markets or other investments. One thing I absolutely do not recommend is cashing out your equity to invest in stocks. Not only are you adding the risk of a greater debt load, you’re also taking on the added risk that comes with investing in stocks.
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The Best Mortgage is No Mortgage At All
I may be a loan guy, but I’m a firm believer that the best mortgage is no mortgage at all. A big reason America is suffering in this current economy is because we’re so overburdened with debt (check out my post The Number 350 Is The Problem With The Economy). Debt can be a useful tool when it helps you reach your financial goals, but it also can carry a lot of risk with it. Leverage is a double-edged sword, so use it with care!
In my opinion, paying your mortgage off early is one of the best financial moves you could ever make. Making the sacrifice today to accelerate the payoff of your loan will mean greater financial freedom in the future.
Pay It Off Faster With Low 10-Year and 15-Year Financing
With rates so low right now, many homeowners are opting to refinance their 30-year loans into low-rate 10-year or 15-year fixed loans. The benefit of going with a short-term loan these days is that you not only get to take advantage of historically low interest rates, but you often get additional rate breaks for the short loan term. The payment can be higher than on your current 30-year loan, but it may not be as high as you think. If you can swing the higher payment, believe me you’ll thank yourself later! Not only will you pay down your home loan far faster, you’ll keep a lot of finance costs in your pocket that would otherwise have gone to the bank.
Need Some Ideas For Paying Your Mortgage Off Early?
If you need a few easy ideas for paying off the mortgage early, feel free to check out my post Early Mortgage Payments: Some Ideas For Paying Off Your Mortgage Faster.