Owning a home is a monumental goal, but it also means you’re saddled with a monthly payment for the duration of your home loan. Tack on the loan interest payments—with rates still hovering just under 7%—and suddenly the total cost is far higher than the list price
But if you’re longing for the days when you’re mortgage-free, you may want to think twice.
“Paying a home off early is a personal decision,” Carlos Scarpero, mortgage broker with Scarpero.com, tells Realtor.com®. “One less bill to deal with and more cash flow, which can be especially helpful in retirement.”
Every situation is different, and at various stages in life, a mortgage can be a positive asset or a financial burden. Mortgage experts weighed in on the pros and cons of paying off your home loan.
The payoff
If you have a limited income and your mortgage represents a large portion of your monthly expenses, paying off your mortgage will free up additional funds. You’ll be able to save by not paying the loan’s interest, which can add up to tens of thousands of dollars over the course of the loan.
“Interest is essentially the cost for using other people’s money,” says Amy Adams, real estate broker at The CE Shop. “The longer you use someone else’s money, the more it will cost you.”
The payoff all comes down to timing.
“If you’re younger, still building wealth, or have higher-interest debt elsewhere (like credit cards or personal loans), it might not be the best move just yet,” Shmuel Shayowitz, mortgage banker and president of Approved Funding, tells Realtor.com. “While the mortgage interest deduction may not be as valuable as it once was for many people, it still offers some tax benefits. Historically, the cost of mortgage money is relatively low, so it’s still considered among the ‘best’ debt to have.”
But if you’re gearing up for life after working a nine-to-five job, not having the monthly expense may outweigh the tax benefit.
“If you’re nearing retirement with little to no other debt, and your emergency savings and investments are in good shape, that’s usually a good time to consider it,” explains Shayowitz. “Eliminating your mortgage can give you incredible peace of mind and lower your monthly expenses, which is a big deal when you’re no longer earning a full-time income and looking to better manage your living expenses.”
The penalties
Paying off your mortgage can have its downside. First, it’s best to check what kind of loan you have. If it’s a nontraditional loan, it may be tied to prepayment penalties. Usually, traditional loans such as a 15- or 30-year fixed-rate mortgage do not have any penalties for paying them off early.
Some experts point out that paying off a mortgage means losing out on any interest tax deductions, but that’s balanced with “not” paying any interest to begin with.
“Some people also struggle to save the money for their property taxes and insurance every year,” says Adams. “Many borrowers enjoy having their taxes and insurance escrowed every month because it is easier for some than coming up with lump sums.”
Even without a monthly mortgage payment, you’re still responsible for property taxes and homeowners insurance. Without escrow, it’s now up to you to budget and set that money aside.
“You’ll lose the mortgage interest tax deduction (if you still itemize),” says Shayowitz. “You will no longer have leverage—meaning, your money is now tied up in the house. You won’t benefit from your equity until you sell.”
Equity is the value of your home that you own, minus any mortgage debt.
Family money
In certain circumstances, a person may come into an inheritance, and then the question looms as to what is the best way to spend it or save it. Paying off your mortgage may come to mind.
“That will depend on the amount you inherit and how much you owe on your mortgage,” Michelle White, mortgage expert with The CE Shop, tells Realtor.com. “It may also depend on how committed you are to saving. Paying off a mortgage may free up some of your monthly income, but to what end? It’s best to have a whole plan.”
Inherited money comes with its own set of tax implications.
“You will want a qualified adviser to help you determine the best course if you inherit money and want to pay your mortgage off,” advises Adams.
Shayowitz says it’s tempting to throw that money (inheritance) straight at your mortgage—and sometimes, it makes sense, but there are other financial factors to consider.
“Are you maxed out on retirement contributions? Do you have 12 months of emergency savings?
Are you carrying any higher-interest debt,” he says to ask yourself.
“If the answer to all of those is yes, then paying down or off your mortgage can be a smart, low-risk move that gives you freedom and flexibility. But if not, that money may be better used elsewhere, or at least split between goals.”
Keep in mind, it’s best to consult a financial adviser before making any big money decisions.