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Key Takeaways
- Before paying off your mortgage, fully fund your retirement accounts and save enough for emergencies.
- Paying off your mortgage early can eliminate thousands in interest payments.
- Making aggressive mortgage payments can leave you with less cash flow for other expenses.
There are many reasons you might want to pay off your mortgage, but should you? Here’s how to determine whether an early mortgage payoff would be right for you.
Deciding whether to pay off your mortgage early
| Factor | Paying your mortgage off early | Keeping the mortgage |
|---|---|---|
| Debt | Eliminating your mortgage payment will lower your monthly debt. | If you financed (or refinanced) between 2016 and 2021, you probably have a low mortgage rate. In other words, you borrowed historically cheap money. |
| Investing | By eliminating interest payments early, you could save thousands over the life of the loan. | Investing the money — rather than paying off your mortgage — may give you a higher return, especially in tax-advantaged or tax-free accounts. |
| Cash flow | Because your cost of living is lower, you’ll be able to rely on less of your retirement assets to meet monthly expenses. | A long-term fixed-rate mortgage is an inflation hedge, since the lender takes on all the inflation risk. As the cost of living rises, your interest rate stays the same. Over time, the lender receives payments that are less valuable, due to inflation. |
| Taxes | You lose the mortgage interest deduction, but that’s only worth considering if you itemize. | You keep the mortgage interest deduction, which (slightly) reduces the effective interest rate you pay. |
| Liquidity | Paying off the mortgage shifts your wealth towards an asset that isn’t liquid, meaning you can’t access it quickly or freely if you need it. | By choosing not to increase your mortgage payment, you keep more of your cash in accounts that you can access quickly in an emergency. |
Mortgage payoff considerations
Ask financial advisors if you should pay off your mortgage early, and they’ll almost certainly say, "It depends." That’s because everyone’s circumstances, risk appetite and debt tolerance are different. Here’s a look at different factors that might go into your decision.
- Taxes. If you itemize, the benefits of the mortgage interest deduction would disappear after you get rid of a home loan.
- Retirement planning. Prioritize maximizing your retirement savings and investments before worrying about paying off your mortgage. If you’re approaching retirement age, however, paying off your mortgage before you stop working can give you peace of mind as you enter a new phase of life.
- Your interest rate. If you have a low interest rate on your mortgage, it may be worth it to hold onto your home loan. Making aggressive mortgage payments could make it harder to build out your savings or pay off high-interest debts, like car loans or credit cards.
- Emergency funds. By paying off your loan early, you are investing your money in an asset. If you need to access cash for an emergency, there’s no free way to get it out of your home — so you’ll want to have a well-funded emergency account before you think about paying off your mortgage.
Ways to pay off your mortgage early
If you decide that paying off your mortgage makes sense for your financial situation, you have a few options. You could put more money toward the loan, either by making larger or more frequent payments.
Alternatively, if rates have come down since you got your mortgage, you could refinance. This would replace your old mortgage with a new one, with a new rate and repayment terms. However, you’ll want to calculate whether the breakeven point on the closing costs fits with your payoff timeline goals.
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