For many homeowners, a long-term goal is to be free and clear of monthly mortgage payments quickly. It’s a trend that previous generations have pursued, especially because interest rates were much higher back then. With the current mortgage climate staying relatively stable with interest rates, the question now is being mortgage-free sooner still the right play?
The sooner it’s cleared for some borrowers, the better, but that is not the case for many others. It depends on your financial goals as it goes with many money decisions.
If you’re currently indecisive about whether you should make extra mortgage payments for as long as possible, this is for you. This article is a compiled list of pros and cons for quickly paying off your mortgage to help you determine your course of action.
Pros of Paying Off Your Mortgage Sooner
Freeing Up Some Cash
When your debt-to-income ratio is close to its maximum allowable limit, it’s common to believe there would be much more to spend on necessities if you finished paying off your mortgage. And it’s actually true that paying off your mortgage will give you the combined amount of your interest and principal payment to extend toward other places.
Saving Money on Interest
For many borrowers, paying interest rates, whether mortgages or credit cards, seems like a waste. Luckily, you can decrease the impact of interest rates by paying off your sooner. Especially in the first few terms of a mortgage, this could be a great financial strategy when the interest portion is highest.
No One Has a Financial Interest in Your Home
Borrowers who have experienced financial hardship typically demonstrate concern that the bank will find a reason to foreclose their current home. This can cause you to pay extra money against it, hoping you’ll be mortgage-free sooner.
For others, having an extended loan commitment like a mortgage can become a source of anxiety. Clearing the payment off the calendar forever can take off any unnecessary pressure.
Cons for Paying Off Your Mortgage Early
Your funds could be earning more than the interest you are paying.
By any means, mortgages have historically low rates. It’s difficult to invest your money to yield a lower reward than the interest you’re spending on your mortgage.
Inevitably, paying off a mortgage causes extra fees. The lender sets the fee schedule, but it’s usually not an insignificant sum, especially from traditional mortgage lenders.
The Mortgage Interest Tax Deduction Disappears
For homeowners financing a home under the $750,000 mark, the income tax deduction for mortgage interest paid is incredibly beneficial. Before you pay off your mortgage early, think about if you’re willing to give up on a tax deduction you get for simply having a mortgage. Surprisingly, the difference could be significant if it jumps you up a tax bracket.
Can Potentially Limit Your Credit
Most borrowers often don’t consider the benefit a mortgage plays on your credit score. A high-value loan consistently paid on time demonstrates to lenders that you are a trustworthy borrower. With that account no longer available on your credit report, lenders could wrongly perceive you as a higher risk. This could later subject you to limited credit availability or higher interest rates in the future.