Should you Pay your Mortgage Off Early?

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If you own a house, chances are you’ve considered making extra principal mortgage payments in an effort to pay your house off faster.  However, there are some pros and cons to paying a mortgage off early. I was always under the impression that when we were in a financial position to prepay pay the mortgage that we would.  Lately I’ve been reconsidering that, especially while we are in a period of transition with our finances.  Here are some of the factors I’ve been considering.

Better Investment Return

Many investment advisers and finance experts recommend that instead of making extra principal payments, the money is going to bring greater returns if invested instead.  A conservative estimate for stock market returns is around 7%, and if your mortgage rate is around 3-4%, you’re probably going to come out way ahead in the long run if you invest.  Of course, there are other factors to investing, but personally I think it would be a good idea to max out retirement account contributions (I like Roth IRAs at Vanguard) before trying to pay off the mortgage early.

Money is Inaccessible

A huge mental block I have is that any extra money you put toward the mortgage is inaccessible unless you refinanced or took out a home equity loan.  For that reason, I wouldn’t recommend that someone who doesn’t have a 3-6 month emergency fund pay extra on their mortgage.  I would get that emergency fund in place first and then go from there.

Home mortgage interest deduction

If you pay interest on your mortgage, you may be able to deduct the interest on your taxes.  Of course there are stipulations, one being if you don’t itemize your taxes it doesn’t help you. The home mortgage interest deduction is only valid for the amount you deduct over and above the standard deductionwhich is available to taxpayers who don’t itemize their returns.

Those are some of the cons for paying off your mortgage early. Here are some of the pros of paying it off early.

Guaranteed Return

If your mortgage rate is 4% and you make extra principal payments, you could look at it that any money you put towards the mortgage is saving you from paying interest, so you are “earning” 4% on that money.  Sometimes I have to think of things this way to have it make sense to me.  I remember when savings accounts were paying 5%! Those were the good old days.

Financial freedom

I think the biggest advantage to paying off the mortgage early is having financial freedom. Imagine not having to make a mortgage payment each month!  How amazing would that be? That would be a huge amount of money each month that could be put towards retirement contributions, kids college savings, travel funds, or whatever you wanted!  I hate debt and the thought of not having a mortgage payment feels like a dream.

Basically I think it all boils down to your personal financial situation. I don’t think there’s any harm in paying off a mortgage early if it is what you want to do.  I know I would sleep better at night knowing I didn’t have a mortgage payment, and that alone is priceless!  I feel like if you’re even thinking about paying off your mortgage early, you’re probably doing pretty well 😉

What’s your opinion on paying off the mortgage early?

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