If you have the means, the appeal of paying off your mortgage early is obvious: You will finally be done making payments on your home — including that continually accruing interest — and you will own your house free and clear.
By going all in on your mortgage, however, it can also mean you have less money to devote elsewhere. Depending on the specifics of your financial situation, the trade-off might not be as worthwhile as you think.
Weighing the pros and cons of early mortgage payoff can help you decide what actually makes the most sense. Here are three of each.
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Pro: Your home loan will be paid off.
A major upside of paying off your mortgage early is the peace of mind it offers. “If you ever face job loss or a sudden medical issue, you won’t have to worry about a looming housing payment or the possibility you could lose your home if you fall behind,” said Rocket Mortgage. Overall, your costs of living will become lower. This added room in your budget can be a major upside if you are living on a fixed income — a common reason retirees consider early mortgage payoff.
Con: You will have less cash on hand, or for other purposes.
If paying off your mortgage requires depleting your cash reserves, you could end up in a tight spot later should a financial emergency arise. It is also important to think twice about focusing on your mortgage if you have other higher-interest debt to pay off. Even if that’s not the case, the opportunity cost is still worth considering. “Investing the money — rather than paying off your mortgage — may give you a higher return, especially in tax-advantaged or tax-free accounts,” said NerdWallet.
Pro: You could save on interest payments.
“No mortgage payment means no interest charges, which could save you hundreds of thousands of dollars over the remainder of the loan,” said Experian. Your exact savings will depend on factors like the size of your mortgage and how high your mortgage interest rate is. Timing also matters, due to the fact that early mortgage payments go more toward paying down interest than principal. As a result, the “earlier in the repayment term you pay it off — or pay more toward it — the more you’ll save.”
Con: You will lose the mortgage interest deduction.
Having a mortgage does grant you some benefits, namely the mortgage interest tax deduction. If you pay it off, you can no longer deduct your mortgage interest from your taxes. Depending on your situation, losing this tax deduction could increase your taxable income, raising your tax bill and even pushing you into a higher tax bracket.
Pro: You will build equity in your home faster.
By accelerating your mortgage repayment, you also build home equity more quickly. This is the percentage of your home you own versus the amount you still owe on your mortgage, and it can come in handy should you ever need to borrow money down the road. Options like home equity loans and HELOCs tend to have lower interest rates.
Con: You could face prepayment penalties.
While not especially common, some lenders do charge a fee if you pay off your loan ahead of schedule, particularly within the first few years. “Fees can run up to 3% of your outstanding principal loan balance,” said Experian, which may eat into your savings. It is worth checking your loan documents beforehand to see whether or not your lender charges this fee.
