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Should you pay off your mortgage early just because you can?

Craig Berry
The Mortgage Reports contributor

Should I pay off my mortgage early?

Being debt-free is a top financial goal for most Americans — and a mortgage is the biggest debt most people will ever have.

With that, it makes sense to want to pay off your mortgage early.

Yet many Americans are opting to keep their mortgage rather than paying it off as soon as possible.

So, should you pay off your mortgage early if you have the extra cash?

Maybe. But if you’re earning tax breaks from your mortgage, or if you can refinance into a lower rate and use the money elsewhere, maybe not.

Verify your new rate (Jul 12th, 2020)

In this article:


When paying off your mortgage early makes sense

Paying off a mortgage early could be wise for some.

Not all homeowners can deduct their mortgage interest. Unless there’s a tax break, the “actual” cost of your mortgage is higher. Paying off your mortgage early could make sense in this case.

For homeowners who pay private mortgage insurance (PMI), it may also be wise to pay more than the required mortgage payment amount.

That pays down the loan principal faster and allows the homeowner to cancel PMI sooner.

Remember that in many cases, PMI is canceled once the loan drops below 80% loan-to-value. And if not, you can refinance to get rid of mortgage insurance at that time.

Eliminating your PMI will reduce your monthly payments, giving you an immediate return on your investment.

Homeowners can then apply the extra savings back towards the principal of the mortgage loan, ultimately paying off their mortgage even faster.

When paying off your mortgage early might not make sense

No one wants to pay a mortgage any longer than necessary. After all, having a large debt hovering over you for years, tallying interest, is an unsettling feeling.

Before hurrying to pay off your mortgage by applying extra principal, or shortening your mortgage term, it’s important to take a look at your entire financial landscape.

For most people, the following financial questions should be answered before paying off your mortgage:

  • Are you fully funding your retirement accounts?
  • Do you have health insurance, life insurance, and disability insurance?
  • Do you have enough money saved for your child’s college education?
  • Have your student loans, car loans, and credit cards been paid off?
  • Do you have an emergency fund in place?

In short, only pay off your mortgage if you will be in great financial shape afterward.

If you answered “yes” to these questions, it might be time to think about paying off some of your mortgage balance early.

When to refinance instead of paying off your mortgage early

A refinance can change the math when deciding to pay off or pay down your mortgage.

A 15-year fixed-rate loan locks you into a much lower rate, plus requires extra principal each month. That retires your mortgage in half the time compared to the more popular thirty-year loan.

A refinance with any loan term, though, can lower your interest rate so much that it no longer makes sense to pay off the mortgage.

For instance, a homeowner has a 5% mortgage rate, but current rates are below 4%. A refinance could reduce the cost of having that mortgage enough to justify keeping it.

A mortgage frees up five or six figures in cash with which to invest, accomplish other financial goals, or to save for emergencies. Once you pay off a mortgage, it can be difficult to get that cash back.

A missed payment or unpaid medical bill can drop your credit score. That makes it more expensive — or impossible — to take out a mortgage on the property again.

So before paying off a home loan in full, see if it makes sense for you to refinance and get a lower monthly payment. That way you can keep your cash flow freed up for other needs.

The best mortgage refinance companies (July 13, 2020)

“Good debt” versus “bad debt”

U.S. household debt is at an all-time high, according to Reuters. And about two-thirds of it is mortgage debt.

But when it comes to managing household debt, the “right” thing to do is different for everyone.

That’s because all debt is not equal. And since most of us cannot live entirely debt-free, it’s important to understand the differences between good debt and bad debt.

A mortgage is “good debt” — it adds to your financial portfolio

Simply put, good debt is an investment that will increase your net worth and help you generate long-term value and/or income.

Good debt also allows you to manage your finances more effectively, to leverage your wealth, to buy items you need and to handle unforeseen emergencies.

Financial experts agree that a mortgage loan is considered good debt because it not only has lower rates than most other debt, in most cases mortgage interest is tax-deductible.

For this reason, even the wealthiest individuals who don’t need a loan will often opt for a mortgage when purchasing a home.

A great example of this is Facebook’s founder Mark Zuckerberg. Even at a net-worth of $53 billion, Zuckerberg didn’t pay cash for his home purchase.

“Bad debts” are more important to pay off early than your mortgage

On the other hand, bad debt is typically incurred to purchase things that arise out of want, rather than need. These items lose value quickly and don’t generate long-term income.

Credit card debt is one of the most common examples of bad debt. Credit card debt is not tax-deductible, and often piles up quicker than most people realize.

Bad debt can also stem from payday loans, expensive vacations, luxury items such as jewelry, and expensive clothes.

These debts often have much higher interest rates than home loans do. And unlike a mortgage, they don’t add to your wealth over time.

Thus, paying them off early will often be a higher priority than paying off your mortgage early.

Refinance into today's low mortgage rates (Jul 12th, 2020)

What are today’s mortgage rates?

With mortgage rates still at historic lows, as well as mortgage interest tax deductions, there can be a good argument against paying off your mortgage early.

Analyze the pros and cons of paying off your mortgage early. Ultimately, the decision should be based on your financial goals on your own personal situation.

Get today’s live mortgage rates now. Your social security number isn’t required to get started, and all quotes come with access to your live mortgage credit scores.

Verify your new rate (Jul 12th, 2020)