When Does It Make Sense to Pay Off Your Mortgage Early?

Team Simplist
Apr 13, 2022

Financial experts offer differing perspectives, so find out what makes sense for your individual budget and long-term goals.

Less debt is always better, right? That’s what most of us have been taught throughout our adult lives, and many of us strive for that zero balance (high five if you’re there already). But did you know that not all debt is created equal? When it comes to your home mortgage, the debt you carry is often considered positive because of its impact on long-term financial planning and wealth-building. Unlike other debt (we’re looking at you, credit cards), mortgage balances tend to carry quite low interest rates, plus they offer other perks such as tax deductions and the obvious ability to build equity in one’s own home while making repayments. That store card you got pressured into at the checkout? Not so much.

By now, you may be asking yourself whether you should opt for a shorter mortgage term than the traditional 30-year. So, should you make extra payments to rid yourself of mortgage debt sooner rather than later? When is paying off your mortgage early the smart move—and when is it a mistake? Let’s take a closer look:

If you’re saddled with a higher interest rate A higher interest rate can be the result of both market forces and your personal finances at the time that you applied for your loan (perhaps now you’re less inclined to rack up credit card balances on impromptu happy hours, in which case, we salute you). Depending on when you bought your home, what your credit was like at the time, and whether you’re currently making private mortgage insurance (PMI) payments each month, you may now be paying more for your money than you need to.

If you’re paying too much interest on your mortgage, you can either choose between paying it off early or refinancing in order to take advantage of today’s lower interest rates.

If you’re experiencing diminishing returns from the mortgage interest deduction One of the primary arguments against paying off a mortgage early is its impact on the federal mortgage interest deduction. However, once you are past the mid-point of a 30-year mortgage, your amortization schedule will reflect a shift away from paying more for mortgage interest than you’re paying on the loan’s principal. That means that as you get further into your mortgage term, you’re paying less interest each year.

Taken along with changes to the tax code following the 2017 Tax Cuts and Jobs Act, some homeowners may find that there is no longer enough mortgage interest paid each year to make it worth itemizing their tax deductions. If you’re in the home stretch of your mortgage term and are no longer enjoying significant tax benefits, it may be time to get serious about paying off your mortgage.

If you’re looking for more money to invest elsewhere If you pay off your mortgage and don’t do anything else with that money, you may be missing out on the opportunity to put your money to work for you. That’s because the payments you make on your mortgage are generally considered an investment; they are often seen as a strategy for forced savings and increased financial security.

However, if you’re getting serious about alternative strategies with higher returns on investment (ROI), paying off your mortgage to free up money for more profitable ventures may be a good idea. Whether you use the newly available monthly payment to increase your cash reserves, or use the equity to secure investment properties or a business loan, a debt-free home can make other types of investment possible. Of course, we always recommend talking to your financial professional before making any big decisions.

If it offers you increased peace of mind There are some things that are simply more important than dollars and cents. Depending on your health and other factors, you may find that owning your home outright offers you a sense of security that outweighs other factors. Knowing that you and your family will always have a home to call your own may afford you additional peace of mind, and help you sleep better at night.

Things to consider before paying off your mortgage early

If you have considered your options and determined that you would like to pay off your mortgage early, there are a few factors to take into consideration before you move forward with your plans. These include the following:

Prepayment penalties Check with your lender and find out whether your mortgage includes penalties for early payoff. If you are paying off your mortgage early in order to save money on interest, you may find that prepayment penalties offset the benefit you were anticipating.

Impact on cash reserves It’s great to be debt-free, but not if you are making yourself cash-poor in the process. If paying off your mortgage early is going to severely impact your cash flow, making it difficult for you to plan for the unexpected or enjoy your day-to-day life, you may want to reconsider your timeline. Remember, cash that is tied up in your home is not liquid, so even though your home’s value will be reflected in your net worth, that cash will be difficult to access if needed.

Potential downsizing Think about how much home you’re going to need in the foreseeable future. It may not be a good idea to have all of your money tied up in a large home if you think that you’ll eventually be ready to downsize. Determine whether you want to wait until you’re ready to move before owning your home outright, or whether you’re ready to downsize now and use your existing equity to pay cash for a smaller home.

Your home’s long-term value It will be important for you to continue to properly maintain and update your home in order to maximize its value. You don’t want to tie up all of your money in the home, then find out that deferred maintenance or a failure to keep your home’s fixtures and finishes up to date has undermined its market value.

Plans for the money you’ll save Do you have plans for the money you’ll save in your monthly budget once your home is paid off? By increasing the amount of money you’re devoting to an early payoff, you may be missing out on other financial opportunities. Think through your goals and determine whether they are better served by an early end to the mortgage or whether other investments can make a bigger impact and get you where you want to go financially. If you haven’t engaged a financial advisor already, now might be a good time!

Whatever your plans, Simplist has the advice and options you need to make the right choice for your home financing. Talk to one of our licensed loan experts today – we can walk you through your options and help you determine whether it makes more sense to pay off your current mortgage or refinance your existing debt with more favorable terms. We’re here to make things well…simple.

View all articles