The world is chock-full of conflicting financial advice. From some experts, you’ll hear that you should pay off your mortgage as fast as possible. But, from others, you’ll hear the opposite — that you should just keep plugging away and making your payments every month, nothing more.
So, what should a homeowner do? Even if you’ve done a little research on this topic, you’re probably still left wondering, “Should I pay off my mortgage?” As a homeowner myself, I was curious about this question, too, so I reached out to a handful of finance and real estate experts for their take.
Bottom line: There’s no one-size-fits-all approach to personal finances, and everyone’s money situation is different. But as you consider whether to pay off your mortgage, consider these pros and cons. “Everyone should know there are a lot of interconnected parts to financial wellness, and this is a great example of that,” says Alec Hanson, chief education officer for the mortgage lender loanDepot. “On the surface, paying off your mortgage sounds fantastic — no one really wants a mortgage. But underneath that … you start to realize it’s not a simple yes or no question.”
Pros of Paying Off Your Mortgage
Should I pay off my mortgage? Let’s start with the benefits of getting rid of that monthly payment.
A big one? You’ll pay less interest. This is an especially lucrative perk if your mortgage has a high interest rate. “Because interest accrues monthly, paying off your mortgage early will save you money that you would have otherwise paid in interest,” says Brandon Snow, executive director of mortgage strategy at Ally Home. “This extra money can be used towards paying off other debts or building your savings.”
Paying off your mortgage also means you no longer have to worry about a monthly payment, says Orphe Divounguy, a senior economist at Zillow. And that can be a huge help for homeowners who are on a fixed income, like retirees, or anyone who doesn’t have a steady paycheck, like self-employed individuals or people who get paid on commission. This frees up hundreds, or even thousands, of dollars each month that you can put toward something else — like paying off other types of debt with higher interest rates, sending your kids to college, or investing in high-earning investments. “Without the burden of a mortgage, you may also be in a better position to weather a job loss or unexpected financial emergency,” Divounguy adds.
Another perk of paying off your mortgage is financial security. Once your mortgage is paid off, you no longer run the risk of foreclosure. “You will own your home outright, so you’re financially secure in the place you live, which can give you peace of mind,” says Trey Danna, a Compass real estate broker based in Seattle.
Without a mortgage, there are very few scenarios in which you could lose your home, which can help you breathe a huge sigh of relief. “Even in a bad financial downturn, you own your home and just need to cover the insurance, taxes, and maintenance of the home,” says Demetrios Sourmaidis, operations director for SquareFootHomes.
Cons of Paying Off Your Mortgage
Of course, there are also downsides to paying off your mortgage. A major drawback to paying off your mortgage is that you could be losing out on earnings from investing that money elsewhere, like the stock market. This is especially true if your mortgage has a low interest rate.
“When you pay off your mortgage, you are using cash that could go toward other, more lucrative investments,” says Divounguy. “Let’s say you pay off a mortgage that has a 3 percent interest rate, but that cash could earn a 6 percent return if it were invested elsewhere. Those lost earnings are the opportunity cost of paying off your mortgage early.”
You also miss out on a major benefit of homeownership come tax season: deducting your home mortgage interest.
“You will lose the federal mortgage interest deduction tax benefit,” says Danna. “This may cause your taxes to go up.”
If you use your savings to pay off your mortgage, you may also run into trouble later if you don’t have enough cash on hand to cover unexpected expenses, says Hanson. You may be “house rich,” but you’ll also be “cash poor,” he says.
“Money tied up in your home can potentially be a problem if you are faced with a financial emergency, so it’s important to consider rainy day savings when making the decision,” he says. “Remember, life throws curveballs at us all the time, and making sure you have the cash reserves to handle those situations is an important part of adulting. Appliances and roofs don’t last forever.”
Depending on the terms of your specific loan, you might also face a prepayment penalty for paying off your mortgage ahead of schedule, says Snow.
“Be sure to check with your lender on any possible penalties before paying off your mortgage,” he adds.
Look at Your Whole Financial Picture
All of the experts I spoke to offered the same advice: Zoom out and consider your mortgage in the context of your bigger financial picture. Whether you choose to pay off your mortgage depends on a whole host of other factors, including retirement savings, other debts, your career goals, whether you want to have kids, and more.
Those factors will likely change throughout your life, so check back in periodically. And don’t be afraid to ask a real, live, human expert for help, too.
“A massive decision like this shouldn’t be made in a vacuum,” says Hanson. “Find a financial planner you trust, consult your mortgage lender, and explore all solutions. Remember, ask a lot of questions and don’t rely solely on the internet. Even after all the advice you digest, you are the one who has to live with the decision and still sleep at night. So make the best decision for you.”
And, as you contemplate this question, there are some smaller, baby steps you can take to help reduce the amount of interest you pay. For example, rather than saving up to make one, big, lump-sum payment to pay off your mortgage, consider making extra payments as your finances allow. (But do be sure you specify that you want the extra funds to go toward principal, not interest.)
“By making extra principal payments early on, you can decrease the total interest over the life of the loan,” says Divounguy.