Benefits And Disadvantages Of Paying Off Mortgage Early
This BLOG On Paying Off Mortgage Early Was UPDATED On December 13th, 2018
Pay Off Mortgage Early? Advantages & Disadvantages
“Free and Clear” ownership is the end game for many homeowners, and for good reason.
- However, paying off mortgage early isn’t the best of use of one’s money in a lot of instances.
- This blog will explore the advantages and disadvantages of paying off mortgage early
- Hopefully the information contained herein will better equip a homeowner with the requisite knowledge to make the decision whether to retire a mortgage early or not
Advantages of Paying Off Mortgage Early
When it comes to prioritizing your debt, mortgages are not always at the top of the list.
- For many, that may seem counter intuitive because mortgages are a huge debt to carry
Let me summarize the pros and cons of getting rid of a mortgage.
- The biggest and most obvious advantage is interest savings
- The advantage of paying off mortgage (or any type of debt) early is that borrowers pay less interest
- For example, if a mortgage borrower owe $200,000 on a 30-year, fixed-rate mortgage at 5%, the monthly payment will be about $1,073
- If homeowners keep the mortgage for 30 years, They will end up paying a total of $186,000 in additional interest
- This is almost double the actual cost of the property when paid over 30 years
Case Scenario On Paying Off Mortgage Early
Take for instance the following example to understand interest savings.
- If a borrower was to receive a $20,000 windfall and apply it all to their mortgage principal in their 4th year, that borrower will pay off the loan in 25 years instead of 30
- Homeowners cut the total interest from $186,000 to $144,445.79—saving about $44,554.21 over the life of the loan
- So instead of going on a European vacation and spending your $20,000 windfall, borrowers actually double their windfall in interest savings over the life of your loan by applying it in full and directly to the mortgage
Russ Weiss, a CFP with Marshall Financial Group, offers both pros and cons.
- The pros include:
- Peace of mind:
- “A lot of what I do is managing behavior vs. managing investments,” he said
- “If paying off a mortgage means the client is less likely to panic with their portfolio value down, I am inclined to recommend it”
- It is hard to put a price tag on peace of mind
Discipline In Saving
Good savings vehicle. “Some clients are not good savers,” Weiss said. “By paying off the mortgage, it creates a form of forced savings.”
- Paying down a mortgage is different from just moving money into a savings account, where by the click of a button people can use savings money
- A savings account requires a good amount of discipline to just leave alone:
- Whereas as in a mortgage there are more steps to take to access the money via a HELOC or cash out refinance
Taking more risk in the overall portfolio. “By paying off the mortgage, it allows us to revisit the investment portfolio structure and allocate more money to stocks.”
Disadvantages of Paying Off Mortgage Early
But the disadvantages of paying off a mortgage early come when homeowners money could have been better spent.
- Mortgages are relatively cheap debt
- They also come with tax benefits that can make them cost even less
- Currently the going rate for a 30-year, fixed-rate mortgage is around the mid to upper 3 range
- This is what people mean when they say “money is cheap”
- Once homeowners send extra money to pay down a mortgage it’s tied up in your property
- If someone unexpectedly loses their job or suddenly have a large expense, they won’t be able to get that money back easily, as I have touched on earlier in this blog
- If a homeowners property value goes down that homeowner might not be able to access their funds absent a sale of their home
Weiss also lists several reasons for not retiring a mortgage early, including:
- “By borrowing for long periods of time at low rates and investing the difference, the client will most likely end up with more wealth versus paying off the mortgage”
- Right-sizing debt:
- “People typically buy too much house and therefore take out too much of a mortgage,” he said
- “If paying off the mortgage is a concern, they should consider the possibility they purchased too much house
- The right amount of debt is favorable to long-term wealth growth, assuming a low-interest-rate environment”
- Inflation hedge:
- “Paying off the mortgage does not help to provide income,” Weiss said
- “Plus, the bank takes all the risk
- Over a 30-year history, assuming the borrower makes all the monthly payments, the bank can never call the loan
- This provides for a fixed payment for 30 years that will never change
- Taking inflation into account, it’s possible that 20 years into the mortgage, the payment will be equivalent to an electric bill or similar”
- I would advise a client to really contemplate what is important to him in deciding whether or not to pay off their mortgage
- For example, If a client is a disciplined saver and investor, their extra money might be better served in a low risk mutual fund than paying off their mortgage
- If someone has difficulty saving money for instance, because they are constantly dipping into their savings account, then paying off a mortgage would probably be a good savings vehicle for them
Again, peace of mind is priceless. If paying off a mortgage is going to provide a great deal of peace of mind and comfort, then it might be ideal. I would always advise a client to speak to a Certified Financial Planner for any decisions as “earth shattering” as retiring their largest debt.
About The Author Massimo Ressa
Massimo Ressa is the Chief Executive Officer of Gustan Cho Associates at Loan Cabin Inc. NMLS 1657322. Massimo Ressa of Gustan Cho Associates Mortgage Group is a licensed mortgage loan originator licensed in multiple states. Massimo Ressa of The Gustan Cho Team at Loan Cabin Inc. leads a team consisting of licensed and support personnel known nationally of not having any lender overlays on government and conventional loans.
Gustan Cho Associates at Loan Cabin Inc. are experts in the following:
- No Lender Overlays On FHA, VA, USDA Loans
- No Lender Overlays On Conventional Loans
- Non-QM Loans
- Bank Statement Loans For Self Employed Borrowers
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