Paying Off a Mortgage Early: Pros and Cons

If you own a home, or have owned a home, then you are familiar with the concept of having a mortgage. When you first get your mortgage you may have been told that there was or was not a penalty for paying the mortgage off early. If you are still searching for a mortgage, then asking about the early pay-off penalty is a good step to take. Not every mortgage company charges a fee for paying off the mortgage early, and it may be something you would like to consider. But before you start thinking about paying your mortgage off early, there are some pros and cons to think about that can affect your finances and your life.

Taxes

Your mortgage interest is tax deductible and, for the first 5 to 10 years of your mortgage, that can be a significant tax write off. One of the cons of paying off your mortgage early is that you no longer reap the tax break that a mortgage brings. You can do some math and start to figure when your mortgage interest fall below the standard deduction, but as tax laws change from year to year you run the risk of missing out on a very lucrative tax write-off.

Refinancing

Refinancing your home to get money to pay off large debts or make large purchases such as a vehicle is a viable form of financing. It can be easier to refinance your home that to try and get a new mortgage, and it can be be cheaper to get a refinance on your current mortgage than trying to get a second mortgage on your home. When you pay your mortgage off early, you lose the ability to refinance. That can make consolidating your bills or getting the money to pay for that new roof a bit more difficult.

Extra Funds

The biggest pro to paying off your mortgage is the extra money each month that you will have without a mortgage payment. That money can go towards paying off debt or go into savings to be used later. In many cases, getting rid of a mortgage payment can create an extra cash flow of as much as $1,000 to $2,000 a month. That money can be put aside for family vacations, holidays or used to help renovate your home.

Collateral

Once your home is paid off, it can be used as collateral for a large financing need. If you plan on starting your own business, then your paid-off home can be used as collateral with the bank to get you the start-up financing you need.

Credit

Paying off a mortgage early can help improve your credit rating. Paying off installment loans early usually has a positive effect on your credit report, and paying off a mortgage early would have a significant positive effect on your credit score. You can use your improved credit score to get the financing you need for other projects and future purchasing needs.

Retirement

If you pay your home off while you are in your 40's or 50's, then your home will appreciate in value as you head towards retirement. You can then sell your home to help pay for a new life in your retirement.