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Is Paying Off Your Mortgage Early a Good Idea?

Kristin McFarland, Chris Kissell


If you can spare the cash to pay off your mortgage early, you could get on the fast track to owning your home free and clear.

But just because you can doesn't mean you should pay off your mortgage early. It all depends on your financial needs and life circumstances.

[Read: Best Mortgage Lenders.]

What Happens When You Pay Off Your Mortgage?

Once you pay off your mortgage, the lender no longer has a lien on your house. Congratulations! Your mortgage has been paid in full, which likely releases the deed to your home.

You can now put that money toward other goals.

[Read: Best Mortgage Refinance Lenders.]

Is It a Good Idea to Pay Off Your Mortgage Early?

Although paying off your mortgage may be an attractive thought, first weigh these factors.

Opportunity costs: An opportunity cost is a benefit you give up to choose something else.

By paying off your mortgage early, you will save on interest. This savings can be significant -- often, thousands of dollars.

But that means you won't have this cash to invest. "The opportunity costs are lost investment opportunities," says Samuel Scott, certified financial planner and president of Sunrise Advisors, Leawood, Kansas.

That said, you could be in the enviable position to pay down your mortgage and avoid diverting funds from your investments, Scott says.

"It often makes the most sense to pay down the mortgage if someone receives a windfall, such as an inheritance," he says. In such a circumstance, "Paying down the mortgage doesn't impact cash flow or deplete other savings," Scott adds.

Taxes: Mortgage interest might be the biggest tax break for homeowners who itemize their deductions. When you pay off your mortgage early, you will lose that tax benefit.

But offsetting taxable income with mortgage interest is not as common as it once was, Scott says.

"The standard deduction was increased, and it may not make sense for many taxpayers to itemize," he says. "There would not be a tax benefit for an individual to have a mortgage if they take a standard deduction."

Other debts: If you are overloaded with high-interest debt, paying off your mortgage first may not make sense.

"All other debt should be paid off, including credit cards and car loans," says Dallen Haws, financial planner and founder of Haws Financial Planning in Sierra Vista, Arizona. "These types of debt tend to have much higher interest rates."

Life stage: The decision to pay off your mortgage early will depend on your life stage, risk tolerance and other financial goals.

If you're nearing retirement, for example, paying off your mortgage early could make more sense than investing that cash in the market and taking on unnecessary risk. "Paying off the mortgage near or shortly after retirement is a good way to reduce ongoing living expenses," Scott says.

Being debt-free may become more important later in life, giving you peace of mind, he adds.

Time horizon: If you plan to stay in your home for the long term, consider putting extra money toward your mortgage. This doesn't make sense if you don't anticipate paying off the loan.

"Many people are more comfortable in not owing anyone anything and are OK with forgoing potential investment opportunities for this comfort," Scott says.

Adds Haws: "Paying down your mortgage early can be a great opportunity to get ahead in life. But it is important to get other areas of your life in order beforehand."

[Read: Best Home Equity Loans.]

How to Pay Off Your Mortgage Faster

If you want to pay off your mortgage early, you will need to develop a plan and set realistic expectations.

You might want a bold strategy, such as paying off your 30-year mortgage in 10 years. That could require you to double your mortgage payment.

Your budget might call for a more subtle approach, such as making one extra mortgage payment a year. You can achieve this by dividing your mortgage payment by 12 and adding that amount to what you pay each month.

If you do this, be sure to tell your mortgage company to apply the extra payment to your loan's principal. Just remember that when trying to pay off a mortgage, there is no single right answer.

"Owning 100% of your home sooner is obviously a great thing to do," Haws says. "But we have to make sure that we are thinking about every aspect of our life first."