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Paying off your mortgage early—smart or not?

Paying off your mortgage early is a hot topic in the financial world, but is it always a good idea? The truth is that even though on the surface it sounds like a smart financial decision, there are plenty of instances when it’s not a good choice to pay off your mortgage early (and there are some circumstances where it is a good choice).

Like every other financial decision, there are both pros and cons to paying off your mortgage ahead of schedule. And the decision is rarely a black-and-white one.

Reasons Not to Pay Off Your Mortgage Early

1. You Have Other Debt

In most cases, mortgage debt should be the very last debt you pay off. It almost always has a lower interest rate than any other debt, so it costs you a lot less to hang onto it. These debts should take priority over your mortgage:

Credit Card Debt: With the average interest rate on credit card debt at around 17%, this is almost always the most expensive debt you’ll have. This means that it should be paid off first. The exception to this would be if you have credit card debt during a 0% interest period (some cards have a 0% introductory rate).

Student Loan Debt: With some student loan debt, there may be no advantage to paying off your loans early. But rates on student loans are almost always higher than mortgage debt, so if you’re going to pay off debt early, do student loans before mortgages.

Car Loans: Car loans can have higher interest rates than home loans do, and the interest on them is not tax deductible.

Second Mortgages: Interest rates on second mortgages and home equity lines of credit is almost always higher than a first mortgage, so it makes sense to pay these off first.

2. You Aren’t Saving for the Future

If you’re not saving money for retirement, your extra cash will likely do you more good if you’re investing it or saving it than if you’re paying off a low-interest mortgage.

Comparing interest rates to investment or savings returns is a tricky business because you’re not comparing apples to oranges. For instance, you’ll need to factor in what you save in taxes if you deduct the interest you pay on your mortgage.

If you’re investing long term, aren’t paying much in investment fees, and your mortgage rate is pretty low, it’s usually safe to say that you’re better off investing the money. When it comes to savings, it entirely depends on how much you can make off of saving the money and what you think rates are likely to be in the future.

3. You Don’t Have an Emergency Fund

If you don’t have an emergency fund, it doesn’t make a whole lot of sense to pay off your mortgage. Emergencies always pop up—whether your furnace goes out, you have an expensive car repair, or unexpected medical bills. It’s a smart idea to have cash saved up to cover these inevitable expenses.

If paying off your mortgage means that you don’t have any cash saved up, you’ll likely have to take on high-interest debt to cover such emergency expenses. It makes more sense to not pay off the mortgage and have some financial reserves.

4. You Have Other Financial Goals

Using money for anything has an opportunity cost. If you use your money to pay off your mortgage, you may not be able to pay for a vacation or your child’s college education. If you use your money to pay off your home, you can’t use it for anything else.

Reasons to Pay Your Mortgage Off Early

1. You Need to Lower Your Monthly Expenses

If you need to lower your monthly expenses, paying off your mortgage can help a lot. A common scenario is if someone gets a life insurance payout and wants to use it to make sure they can keep the home they’re in.

2. You Want to Feel More Secure

Some people really dislike having debt of any kind, and it makes them feel more secure to know that they own the home completely. If this is you, you may decide to pay off the mortgage just because. And that’s OK.

3. You Have a Really High Interest Rate

If you have a really high interest rate, might I suggest refinancing? Rates are going up, but they’re still historically low. If you have a really high interest rate and don’t want to refinance, paying off your loan might be a really smart move.

Other Considerations

You should also consider your big financial picture when you’re deciding whether or not to pay off your home. If you’re near retirement, you may make different decisions about your mortgage and debt than you’d make if you’re in your thirties.

It’s also worth considering how long you’re going to be in a home. If you’re only going to be there for three to five years, you’ll never pay most of the interest that you’ll pay if you’re going to be there for the next thirty years.

I am not a financial planner, and this does not constitute professional financial advice. I encourage you to talk to a certified financial planner if you have questions about your financial situation.

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