Why paying off your mortgage early might be a mistake
- Paying off your mortgage early may limit investment growth opportunities.
- Extra payments can reduce liquidity for emergencies.
- Tax benefits tied to mortgage interest could be impacted.
- A balanced approach can help you build wealth while managing debt.
A home may be the largest purchase you ever make, so it’s understandable if you’re excited to pay off your mortgage and make that home fully yours. But paying off your mortgage early isn’t the right move for everyone.
The peace of mind and interest you’ll save on from paying off your mortgage are worth considering. But it’s also worth looking at the downsides of early mortgage payments.
Three reasons why paying off your mortgage early may cost you
Whether or not you should pay off your mortgage early will depend on your specific financial situation, so consider discussing your options with a financial advisor. But here are three scenarios where sticking to your current repayment plan may make more sense:
- Potential missed investment returns: The earlier you invest, the more time your money has to grow. Consider your mortgage interest rate and whether making extra mortgage payments may mean missing out on your investments compounding over the long term.
- Reduced liquidity for emergencies: Making multiple or higher mortgage payments each month reduces your available cash. If there’s an emergency and you’ve used excess cash to pay off your home, you may need to sell stocks or take out a personal loan to cover it.
- Pre-payment penalties: Some lenders charge a fee for paying off some or all of your mortgage early.
When paying your mortgage off early makes sense
As with most financial decisions, you’ll want to weigh the pros and cons of paying off your mortgage early. You’ll also save on interest if you pay off your mortgage early and be able to build up equity in your home faster. That can be helpful if you want to borrow against your home later in life.
If you’re approaching retirement, you may also want to get rid of your mortgage, especially if it’s your largest expense.
The balanced strategy
Some people take a hybrid approach instead of putting all of their extra cash into the mortgage or investments. Homeowners can split excess funds between paying down their mortgage principal and investing so that their money is growing for their future while they’re also chipping away at their debt.
Zero debt is a great goal, but not at the cost of financial flexibility. Financial advisors recommend having some money on the sidelines for emergencies while also investing in assets that can produce long-term wealth.
As always, diversification is key: You don’t want to have all your money tied up in real estate, the stock market or another asset.
This article was written by Marc Guberti from Money and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.
