While buying a house is an exciting milestone and is a symbol that your rent-paying days are behind you, it also means you are taking on a large amount of mortgage debt and paying thousands of dollars in interest payments. Whether you’ve been paying on your mortgage for five years or 20, the dream of owning your home free and clear has likely popped into your head. You may have wondered how long it will take, how much money it will cost you if you keep your mortgage until its full term or if refinancing could accelerate your dream of owning your home outright.
Just like when you weighed the pros and cons of buying a house, you should also review the advantages and disadvantages of paying off your mortgage versus investing or paying down debt that has a much higher interest rate.
Here’s information to consider when determining how your mortgage fits into your financial strategy for the future.
Advantages of Paying Off Your Mortgage
- Peace of mind. Rest easy knowing that you no longer owe payments to your lender.
- Money won’t go out the window. Enjoy having savings in your pocket versus shelling out additional years of interest payments toward your home.
- More financial flexibility. Not being tied to a mortgage provides financial independence to use income to achieve other goals and dreams.
- Security. Eliminating a mortgage balance significantly reduces the risk of losing your home should job loss or unexpected health concerns consume a large portion of your savings.
- Reduce your dependence on Uncle Sam. There’s no guarantee that the tax deduction for interest payments and fees won’t be eliminated over time.
- Save even more. It’s possible that refinancing your home at five or six percent in order to put extra money in a savings account may only yield a less-than-one-percent return.
- Protect against market fluctuations. The more equity you have in your home, the better. If you have $50,000 of equity in your $200,000 home and the housing market goes south (or stays there for a while) and your value decreases to $125,000, carrying a mortgage actually puts you underwater.
Disadvantages of Paying Off Your Mortgage
- Missing out on tax deductions for interest. Typically, the primary reason that homeowners maintain their mortgage debt is to enjoy tax advantages on the interest paid. When you pay interest on a mortgage, that interest is usually tax-deductible (consult your financial adviser for more information).
- Bypassing additional tax deductions. If you paid points (one point is one percent of the loan amount) on your loan to reduce your interest rate on your home purchase, that amount is also tax deductible for that year. In addition, many closing costs, such as fees for your loan application and appraisal, may be deductible.
- Other assets could suffer. If you devote all of your income to paying down your mortgage and don’t have a retirement fund or rainy day fund with ample savings, you may find yourself in a financial hole should an unexpected financially-draining event occur.
- Carrying debts that have higher interest rates. It’s likely that your mortgage rate is significantly less than rates associated with your credit cards or auto loan. Why not eliminate the debt with the highest interest rates first? If you have equity and a solid credit profile, it’s possible to consolidate those debts and eliminate payments that carry exorbitant rates and fees.
- Reduced portfolio of responsible bill paying. Properly maintaining a mortgage payment that doesn’t drain your debt-to-income ratio may lend credibility to your borrowing power and credit portfolio – having debt and making payments on time indicates fiscal responsibility.
- Diversification is threatened. Paying off a home loan may not make sense if it means putting all of your eggs in one basket. If you are on the fifth year of a 30-year note, it may make more sense to invest additional funds elsewhere so you can establish financial savings in other portfolios.
- Other financial goals may get derailed. In high-cost states, where $300,000 or more is owed on a loan, it may be a long time before free and clear home ownership is possible. Consider alternating months of paying an extra mortgage payment and adding to your retirement fund versus only paying down your home loan.
When considering paying off your mortgage sooner rather than later, you must examine your financial situation and both short- and long-term goals. How long do you plan on living in your current house? What is your current rate and term on your loan? Do you carry several other debts like a car payment or student loans that you wish were off your plate? What is a more valuable goal to you, paying down high-interest rate debts like credit cards or paying toward owning your home free and clear? Bear in mind questions like these when deciding if owning your home outright is truly right for you.