As we have highlighted in previous articles, owning a home is one of the best ways to accumulate wealth. Since most homeowners will likely have a mortgage on the home they own, the next logical step is to pay off your mortgage. Of course, even if you happen to pay off your mortgage you will always still have your property taxes due each year. Nonetheless, being mortgage free in your home can be quite a liberating feeling. As with any financial decision, there may always be some advantages and disadvantages. We highlight a few of these below.
Pros of paying off your mortgage
- Save money on interest: If you take a look at your monthly mortgage statement, you will see that a good portion of it is paid to interest. If you pay off your mortgage, you will likely save yourself thousands of dollars in interest over the life of the loan.
- Free up available cash: By not having to pay money each month towards a home loan, you will free up a lot of your monthly income. This money may be used for other investments that may produce an even greater return. Even a conservative approach to investing this money such as in treasury bonds or certificates of deposit can produce returns.
- Debt freedom: There is something to be said about the psychological well-being of not having a large loan hanging over you. A nice byproduct of debt freedom is not having the same pressures of maintaining an income.
- Property ownership: If you have a mortgage, your lender owns a large part of your property. Upon paying off your mortgage, this is no longer the case. Should your finances become worse, this is one less thing to have to consider.
Cons of paying off your mortgage
- Investing your money in other areas could be more profitable: Although your monthly payments will be reduced by paying off your mortgage, it is possible that you could achieve a better rate of return by investing your money elsewhere (instead of paying off your mortgage). For example, historical stock market returns of around 8-9% on average, is a better use of your money if the interest rate on your mortgage is a lot less.
- Access to your cash: The more money you have tied up in your home, the more difficult it is to access it quickly. Of course, selling the home will free up this cash but it will take some time. Alternatively, you would need to open an equity line of credit on the home in the event that you needed cash quickly.
- Pre-payment penalties or fees: Since the lender will miss out on some of the interest payments should you pay off your mortgage early, it is possible that you may be responsible for pre-payment penalties or fees. As a best practice, you should review the terms and conditions of your mortgage prior to paying it off.
- Tax deductions: As you likely already know, the interest that you pay on your mortgage may be used as a tax deduction. In paying off your mortgage early, you will lose the ability to write off these tax deductions. In addition to the capital gains exclusion, tax deductions are one of the best financial perks of home ownership.
- Credit score: Your credit score is based on the different types of loans that you have. Most likely, your mortgage is the biggest loan that you have. By removing this, it will likely impact your credit score. This is likely not a major consideration though.
Summary
Whether or not to pay off your mortgage is a significant financial consideration. While being mortgage-free can be a wonderful feeling, it is important to consider all options when planning your financial future. If you are closer to retirement, it may likely be more appealing to get rid of monthly financial obligations such as a mortgage. For younger homeowners, you may find that investing your money in other areas may produce a greater return on your investment. As a best practice, it is always recommended to consult your financial advisor when it comes to your financial planning.
Are you looking to buy or sell a home in South Florida? Contact Natasha at Live South Florida Realty, Inc. today! Don’t forget to download the free Florida Home Search app for your mobile device too!
