5 Times You Shouldn't Rush to Pay Off Your Mortgage

If you're fortunate enough to have disposable income, paying off your mortgage early might seem like a smart way to spend your cash. It's definitely a better approach than wasting your money on shopping and recreation. And given how a mortgage loan can take up a third of your monthly income, getting rid of this debt lets you do other things with your cashflow. But just because you have extra cash to pay off a mortgage doesn't mean you always should.

Here's a look at five times when you shouldn't rush to pay off your mortgage.

1. You'll Miss Out on Tax Advantages

During the first half of a 30-year mortgage, a large percentage of your mortgage payments go toward paying down the interest, so your principal balance only decreases a little from year-to-year. It's frustrating to say the least, but think twice before dumping your disposable cash on extra principal payments.

Some people will jump at any opportunity to pay off their home sooner, but there are tax advantages to keeping a mortgage loan. If you itemize your yearly tax return, there's the option of writing off your mortgage interest payments and lowering your taxable income. This reduces the amount owed to the state and federal government, or it might result in a bigger refund. This single deduction reduces my tax liability by more than $2,000 a year.

2. You Don't Have Any Type of Emergency Fund

Everyone needs an emergency fund, period. It doesn't matter who you are or what you do, if you're a middle-income American, you're going to hit at least one rough patch in your lifetime. A six to 12-month cash reserve is your backup plan for unexpected expenses or major setbacks like a job loss. However, you might feel paying off your home takes priority over saving. Your home is your biggest investment, and naturally, you want to protect it. But ask yourself: How's your savings account looking?

If you have plenty of cash in a rainy day fund to handle life's curveballs, paying off your house early isn't a bad plan. But if you don't have any type of emergency savings, the focus should be on building your account. Paying more toward your principal builds equity and gets you closer to owning the property outright, but this plan might backfire if you find yourself unemployed without a cushion.

3. You Don't Have a Solid Retirement Plan

A few years ago I had a conversation with a couple that was committed to paying off their 30-year mortgage early. They put every extra cent toward their mortgage, sometimes paying an extra $400 or $500 a month. Both were in their early 40s, and despite their age, neither had started saving for retirement.

Their plan was to focus on retirement planning after paying off the house. From their point-of-view, the house was their retirement. Without a mortgage, they wouldn't need as much monthly income later in life. I understand their thinking, but there are no guarantees a plan like this will work.

Their plan didn't take into account curveballs like long-term unemployment due to illnesses or layoffs. If for some reason they couldn't pay their mortgage, they would potentially lose their house and their equity — and essentially their retirement.

There's nothing wrong with paying extra toward your mortgage, just make sure you're also planning for the future and saving enough for retirement.

4. You Have High Interest Debt

What you paid for your house is probably more than what you owe on credit cards, and getting rid of your biggest expense may seem like the best way to attack debt. But although we spend hundreds of thousands of dollars buying a house, average mortgage interest rates aren't as high as some credit cards'.

Credit card debt is a never-ending battle, especially when you have a high interest rate and you're only paying your minimum. Paying off your mortgage early is an excellent goal, but don't rush. Make high-interest debt your priority. These include credit cards, personal loans, and other lines of credit. Besides, paying off these debts gives your credit score a boost. Once you have these creditors off your back, you can focus on paying off your mortgage.

5. You Have a Prepayment Penalty

Some mortgage lenders stick borrowers with a prepayment penalty, which is basically a fee for paying off their mortgages early, usually within the first five years. This penalty discourages early pay-offs. Lenders calculate an estimated rate of return for each loan, and the longer a borrower owes on a loan, the more a bank earns.

Typically, a prepayment penalty only applies to refinances and cash payoffs, and most banks waive the fee if a borrower sells the home. If you're coming into money and thinking about paying off your home, read your paperwork to learn whether your mortgage has a prepayment penalty.

Did you pay off your mortgage early? Do you have other tips on why we shouldn't? I'd love to hear your thoughts in the comments below.

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Guest's picture

How about don't put all your eggs in one basket. Tying up a substantial portion of your net worth in you house is not consistent with diversification to reduce the risk of something happening to the value of that asset. Bad things can and have happened to real estate values.

Guest's picture

I agree with most of this but I don't agree with #1. I don't think a mortgage should be kept just for the tax advantages. I just refinanced my 30 year loan to a 15 year. If I had stayed with the 30 year loan I would have paid the bank $250k just in interest over the 30 years. For the 15 year loan I'm paying $50k in interest total. So I am saving $200k in interest, and would anyone say it would be better if I pay that $200k and get a $1k or $2k refund on my taxes for those extra years? No thanks.
The tax advantage is nice, but I don't think it should be used as a reason not to pay off your mortgage early.

Guest's picture

Reason #1 has throughly been debunked. $2000 in tax savings is silly if you're still paying $15,000 a year in mortgage interest. How about not paying that $15,000 at all? That's quite the savings.

#3.. I'm 39 and I paid my house off last year. Part of my thinking was that if I DID get hurt or something else long term happened, I have a free place to live and wouldn't have to worry about being foreclosed on or kicked out. I have insurance and property taxes still of course, but that comes to $200 a month. I've felt mostly solid in my decision to pay off my place but I still wonder. I honestly felt nervous about keeping that much money just in a bank account. Seems every week we hear of a new bank/retailer hacking scandal. I was worried I'd wake up one day and find that money in my account gone without a trace. At least with sinking that money into my house, I have something to show for it. My place is insured against fire/etc, but there is a potential risk of earthquakes in our area (and insurance doesn't cover that). I have to admit that my house potentially could crumble into a worthless pile of trash (hopefully not while I'm inside!). Definitely different scenarios to think about! Overall though it seems saving the money you don't pay to a bank for interest on a loan is just huge.. Outweighs most anything else.

Guest's picture

In general, this is great advice for anyone focusing on paying as much mortgage interest as possible.

"You'll Miss Out on Tax Advantages"
This is a very skewed description of how tax deductions actually work. The only reason to bother itemizing is if your itemized deductions are greater than your automatic deduction level. In fact, unless you do your taxes yourself, the itemized deductions need to be significantly greater than your automatic deduction level to account for the added cost of tax preparation. "Lowering your tax liability by $2000" assumes that you have enough additional deductions to actually lower your liability.

"Your home is your biggest investment, and naturally, you want to protect it."
your house is not an investment. The odds of it increasing in value enough to overcome the amount of interest you pay over the lifetime of the loan are very low. Your main goal should be lowering the total amount of interest paid, so if you really insist on seeing your house as an investment then the only reasonable response is to pay off the principle as quickly as possible to avoid long-term interest.

"but there are no guarantees a plan like this will work."
There are no guarantees anything will work- including your response to this scenario. Paying off the house early reduces total interest payments, which amount to a surprising amount if you really look at your GFE. Eliminating a mortgage payment in retirement means less income need. Reducing long-term interest costs means more money to save.

Guest's picture

I used to wonder how to get out of debt too but, then I reached out to 14 of the best PF bloggers and I put a book together