Paying off your mortgage early could free up your cash for travel, retirement, or other long-term plans. Being mortgage-free may insulate you from losing your home if you run into financial difficulties.
Paying it off typically requires a cash outlay equal to the amount of the principal. If the principal is sizeable, this payment could potentially jeopardize a middle-income family's ability to save for retirement, invest for college, maintain an emergency fund, and take care of other financial needs.
If you want to reduce the overall interest you pay on your mortgage or free up cash for other uses, paying off your mortgage early can help. Every month you have a mortgage, you pay interest on the total balance left. By paying that balance off early, you eliminate years of added interest payments charged for the loan.
Mortgage interest rates are low
Since rates are so low, devoting extra money toward paying your loan off early provides a very low return on investment (ROI). You could do much better financially by focusing on paying off higher interest debt first, such as credit card debt, personal loans, or even car loans.
It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to save yourself from paying more interest later. If you're somewhere near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.
You should aim to have everything paid off, from student loans to credit card debt, by age 45, O'Leary says. “The reason I say 45 is the turning point, or in your 40s, is because think about a career: Most careers start in early 20s and end in the mid-60s,” O'Leary says.
Paying off your mortgage early frees up that future money for other uses. While it's true you may lose the tax deduction on mortgage interest, you may still save a considerable amount on servicing the debt.
With your mortgage paid off, you do not have to send the mortgage company any more money. Send discharge of mortgage letter to your county: Your mortgage company should send all of the required documents to your county clerk's office notifying them that your home is no longer bound by a mortgage.
You'll just owe more interest. You may have to pay some fees with your final mortgage payment that are often meant to release final paperwork, like proof to the county that you now own the home. But there can also be fees if you're paying off the loan earlier than the original term.
Paying off your mortgage early can save you a lot of money in the long run. Even a small extra monthly payment can allow you to own your home sooner. Make sure you have an emergency fund before you put your money toward your loan.
What are the benefits of being mortgage free? Having more disposable income, and no interest to pay, are just some of the great benefits to being mortgage free. When you pay off your mortgage, you'll have much more money to put into savings, spend on yourself and access when you need it.
When you pay your mortgage off in full, the loan servicer reports the balance paid in full, ceasing the ongoing credit benefits. Paying off your mortgage in full does not directly hurt your credit score, as long as the rest of your accounts are paid as agreed in a timely fashion.
While the average age borrowers expect to pay off their mortgage is 59, the number of survey participants who have no idea when they will pay it off at all stood at 16%. In 2019, 9% of those asked didn't know and in 2020, 11% gave this answer.
One of the pros of paying off your mortgage is that it is a guaranteed, risk-free return. One of the cons of paying off your mortgage is reduced liquidity, as it is much easier to access funds that are sitting in an investment or bank account.
Legally, you don't have to take out mortgage life insurance if you take out a mortgage. However, many mortgage lenders will insist on it to protect their loan in the event of a householder's death. And you might want to buy life cover anyway if your loved ones would struggle to pay the mortgage should you die.
“The home is the largest purchase that most people will ever make, and once they've paid off their mortgage, it becomes the largest asset in their portfolio,” explains John Sweeney, Figure's Head of Wealth and Asset Management.
Invest more in retirement
Life after a mortgage is paid off may include maxing out your IRA each year, and saving up as much as possible for the future. You can also begin to think about the home you'd like to retire in. If that's the home you just paid for, you're all set!
If your monthly mortgage payment is greater than the interest you are receiving after tax, you will be better off paying off your mortgage. If you have an interest only mortgage, overpaying on the interest will have no effect on reducing your mortgage cost or term.
When you have no debt, your credit score and other indicators of financial health, such as debt-to-income ratio (DTI), tend to be very good. This can lead to a higher credit score and be useful in other ways.
Is being debt-free the new rich? Yes, as long as you have money and assets, in addition to no debts. Living loan-free is a fantastic way to stay financially secure, and it is possible for anyone. While there are a couple of downsides to being debt-free, they are minimal.
If the loan you paid off was your only installment account, you might lose some points because you no longer have a mix of different types of open accounts. It was your only account with a low balance: The balances on your open accounts can also impact your credit scores.
Key points. Paying off a mortgage is unlikely to cause a huge change to your credit score. In some cases, paying off a home loan could actually result in a minor credit score hit.
The interest paid on a mortgage is tax-deductible. When you pay off your mortgage, you will no longer be paying interest and will lose this tax deduction. This will make your taxes go up as a result of eliminating this mortgage interest deduction.
Mortgages are seen as “good debt” by creditors. Since the mortgage debt is secured by the value of your house, lenders see your ability to maintain mortgage payments as a sign of responsible credit use. They also see home ownership, even partial ownership, as a sign of financial stability.