Should You Pay Your Mortgage Off Early?

By Dan Rafter on 16 November 2016 0 comments

Hate sending that big payment to your mortgage lender each month? You're certainly not alone. But what if you had the ability to pay off that mortgage loan early, either by paying extra dollars toward your loan's principal balance or by paying off the rest of your mortgage in one giant payment?

Should you do it? Or are there times when not paying off your mortgage early actually makes sense?

Not surprisingly, it depends on a host of factors. Here is what you should look at when determining whether paying off your mortgage early is the best choice.

Tax Benefits

When arguing against paying off your mortgage early, most people point to the mortgage interest deduction. This allows most homeowners to deduct annual mortgage payments.

There is a catch here, though: You can only claim the mortgage interest deduction if you itemize your taxes. And you should only itemize if your deductions are higher than the IRS' standard deduction, which as of 2016 stood at $12,600 for married couples filing jointly and $6,300 for singles and married people who file separately.

This means that those homeowners most likely to benefit from the deduction are those who have purchased higher-priced homes, have a high interest rate on their mortgage, or are in the very early stages of paying off that mortgage. For other homeowners, the deduction will either be less than or barely more than their standard deduction.

This means that you'll need to determine — perhaps with the help of your accountant or financial adviser — whether the mortgage interest deduction is really helping you at your current stage of paying off your mortgage. If it is, then factor this benefit in when determining whether you should pay off your mortgage early. But if it's not? Then don't let the promise of a yearly tax deduction influence your choice.

Other Debt

According to Freddie Mac's Primary Mortgage Market Survey, the average interest rate on a 30-year fixed-rate mortgage stood at 3.54% as of Nov. 3. The average rate for a 15-year fixed-rate mortgage was an even lower 2.84%. Those are both extremely low interest rates.

At the same time, financial website Bankrate reported that the average variable interest rate for credit cards stood at 16.28% as of Nov. 2.

The message here is clear: If you are burdened with high-interest credit card debt, and you have enough money to spend extra on your mortgage loan or pay it off entirely, it makes more sense to put those extra dollars toward your credit cards.

It makes financial sense to pay off debt that comes with higher interest rates first. It might feel good to make that big monthly mortgage payment disappear, but it's smarter to whack away at your credit card debt, which, thanks to high interest rates, can grow quickly each month.

Before deciding to pay extra on your mortgage or pay it off entirely, look at your other debt first: Use your extra money to eliminate the debt that is costing you the most each month.

Are You Staying Put or Moving?

How long do you plan on staying in your home? Do you plan on living out the rest of your days there? Or are you already planning a move in five to seven years?

It makes more sense to pay extra on your mortgage loan if you plan on staying in your home for a longer period of time. By paying extra each month, you can shave thousands of dollars off the amount you'll pay in interest during the life of your mortgage.

But if you plan on moving in five years, paying extra doesn't make as much sense. You'll sell your home long before you come close to paying it off. So if you're not going to be a long-term resident of your current home, put that extra money to better use.

Are You an Investor?

Those who argue against spending extra on your mortgage say that most homeowners would be better off taking those extra dollars and investing them. This goes back to the low interest rates attached to mortgages today. If you are only paying an interest rate of 3.5% on your home loan, why wouldn't you keep that debt and instead invest in the stock market, where you could make a return of 7% or more on that money?

This assumes, though, that you'll actually invest the money that you won't spend on your mortgage loan. If you're more likely to spend it instead, you're better off paying down your mortgage or even paying it off early.

Retirement

Are you close to retirement? You might want to pay off that mortgage early. It's best to enter retirement with as few monthly payments as possible. If you plan to stay in your home after retiring, paying off that mortgage early makes sense. You are then free to use that money that you would have sent to your lender each month however you choose.

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Guest's picture
Guest

Something to consider is that as time goes on, you are paying in dollars that are worth considerably less due to inflation. That mortgage payment will look a lot more reasonable after a few years of inflation, even if some sources say there's no inflation. I would rather pay down high-cost non-deductible debt like car loans and credit card debt, and continue to pay the mortgage on schedule. Consider also that in high-tax states, real estate tax and mortgage interest add up to more than the standard deduction.