Pros and Cons of Paying Off Your Mortgage Loan Early

Are you thinking of paying off your mortgage early? If you have income to spare, you may benefit by retiring your mortgage early. But before you do, you should understand the pros and cons of doing so. It may or may not make financial sense for you. Whether or not it does depends on your unique situation.

The pros of paying off a mortgage early are numerous. First, it will free you from debt. Instead of paying interest on your money, you will be earning it. The total amount of interest paid over the life of a typical 30 years loan amounts to hundreds of thousands of dollars. During the first years of a mortgage, the vast majority of each payment goes towards paying interest. Only a small percentage is applied to principle. If you are able to pay a little extra each month, the principle balance will shrink quicker. For example, paying an extra $100 per month on a 30 year $100,000 mortgage will help you retire the load in less than 25 years. Second, you will obtain the piece of mind that comes from owning a home free and clear. No longer worrying about mortgage payments and the consequences of missing payments is liberating. You will sleep better at night and have more disposable income to do with you as your please. We all dream of day when we are debt free. Third, paying off a mortgage guarantees your return. Every dollar paid early equates to a known amount that you save later. Fourth, you are saving yourself from yourself. You never know what the future holds, what your future income will be, or when you will need extra income. Your spending habits may change. By paying off the mortgage early, less of your future will be in doubt. If you are the type of person who fears the unknown, this may be very appealing.

Before paying your mortgage off early, you should consider the cons. First, you could be earning a higher rate of return by investing than by paying off your loan. This situation is now very common as interest rates have plummeted to below 5%. If you itemize your tax return, a 5% mortgage interest rate is equivalent to paying 4% or less. What if you could take the extra money you are paying on a loan, and invest it, earning 8 to 10%? This amounts to a doubling of your investment return. Second, your tax bill will increase. If you itemize, mortgage interest becomes tax deductible. The mortgage deduction can save you thousands in taxes every year. The more you make, the more you will save. Third, by not paying off your mortgage early, you can spend your money elsewhere. Is foregoing things you want to pay a mortgage off early worth it? Let's face it, you will be foregoing vacations, eating out, and other luxuries. You will have to make sacrifices in one area to benefit in another. This is ultimately an individual decision. For some it is worth it; for others it is not.