First Person: The Downsides to Paying Off a Mortgage Early

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While I'm not going to knock our mortgage-free situation -- openly admitting that it certainly adds peace of mind to our financial situation -- I can honestly say that at times we've experienced some downsides to having paid of our mortgage faster. You'd think that it would be pretty cut and dry -- paying off a mortgage quicker is better. However, that's not the case for everyone.

While we're glad to be rid of our mortgage, I will definitely say that there have been a few downsides to the process of paying it off faster than our loan terms required.

No mortgage interest deduction

While I've heard the mortgage interest deduction likened to paying $1 to save 10 cents, when we were itemizing deductions and paying a large portion of our mortgage toward mortgage interest at the beginning of our loan's term, it was certainly a nice little benefit nevertheless.

Especially earlier on in a mortgage, when a significantly larger portion of an amortization schedule payment can be going toward interest, the mortgage interest deduction can help reduce taxes owed by hundreds of dollars or more. But when that mortgage is gone, so is that deduction, which can be a slight downside to paying off a mortgage faster.

Low interest rates

With current 15-year rates running close to 3.5 or 4 percent and 30-year rates still around 4.5 and 5 percent, average mortgage interest rates are still near historic lows. This means that there could be other options for the money that goes toward or is going toward paying off a mortgage faster.

Whether putting that money toward higher-interest debt such as student loans, vehicle loans or credit card debt, paying off debt with a 7, 10, 15 or even 20 percent associated interest rate can be significantly more beneficial than putting money toward a mortgage with a 4 percent interest rate that might be closer to 3.5 percent after the mortgage interest deduction is factored in.

Meanwhile, there could also be other options for that money than just debt and which could earn better rates that what you're paying on a mortgage. Finding an investment with a higher rate of return than that of a mortgage might be yet another reason not to pay off that debt early.

Fewer investment options

When you've sunk a lot of cash into a home in hopes of getting it paid off faster, it can leave you house poor and with few options if a cash-ready investing option comes along…or worse yet, an emergency.

An example of this occurred when our home was on the market. Around this same time, my father-in-law gave me a great stock tip. Having pumped too much available cash into making extra payments on our mortgage though, I wasn't liquid enough to take advantage of his free information. I found the stock doubling in price in the next few months, and kicking myself for paying down home debt at 5.375 percent when I could have doubled that money instead.

You can't walk away

I'm probably one of the biggest advocates of not walking away from a debt…especially a mortgage. I feel that buying a home and taking on a mortgage is a responsibility that we take on knowingly and is a contract by which we should abide. That being said, if you're plunging tons of money into a mortgage, building principal in that property, should the value of the home go down significantly, but not significantly enough to put an owner underwater on their principal, it can eliminate the option of walking way and increase losses substantially.

This was the situation that we encountered in our last home. While we wouldn't have walked away, even if we could, having put a sizeable downpayment on the property and having pumped extra payments into the mortgage along the way, even when our home value dropped by tens of thousands of dollars, we were the ones eating the losses, not the bank, all because we were working on paying off our mortgage faster.

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Disclaimer:

The author is not a licensed financial, mortgage or real estate professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.

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