Is paying off your mortgage early worthwhile?

Living debt-free is a great achievement for anyone and it all depends on your position in life, it could be within your reach. But even if it is possible for you to pay off your mortgage early, is it a good move? Though you might find it tempting, I would advise you first take into consideration the opportunity cost of settling off your mortgage ahead of schedule at the expense of other investments or goals to be achieved as well as the impact created on your tax situation.

Opportunity cost: 

By considering settling your mortgage ahead of time could be a perfect idea as you have the chance to save the additional expenses on the interest that could be incurred while following the regular payments. This could be a significant saving that would increase along with the prepayment amount. On the other hand, directing more cash on paying your mortgage means those funds are no longer available for investment. Being free from debt at an early stage is the less you stand to benefit.

So how can you be sure whether it is best for you to pay off your mortgage early or invest excess cash? Let’s work with the following examples:

Just in case you had a mortgage with an interest rate of 4% and are already in the 28% federal income bracket. You should have a roughly 2.9% for your after-tax mortgage rate which could be lower if you deduct the mortgage interest on your state income tax return. Investment portfolios for most investors are channeled through a risk tolerance that carries a much higher annualized expected investment return than 2.0%.

Some people will find the “guaranteed” 2.9% to be more attractive than a higher expected market return which leads to a higher unpredictability and risk. For those having a much higher after-tax mortgage rate, they find paying off a mortgage ahead of schedule a much greater option.

You need to take into consideration the following in order to make a more informed decision.

• Taxes: The ability to get mortgage rates deducted is considered the key to tax strategy for many. Consider if deduction itemization would still be possible without mortgage interest.
• Investing: Think of where the cash used to pay off your mortgage would have been directed to.
• Other needs: Think of other needs apart of investing excess cash, do you have any other pressing issues to be handled? Check out your whole financial condition including credit card, student loans, and if you have enough budget to handle emergency situations.

Some other things to consider when thinking about paying off your mortgage early:

Financial Flexibility

Paying off your mortgage early can lead to greater financial flexibility. Without a monthly mortgage payment, you have more discretionary income to invest, save for retirement, or spend on hobbies and travel. This flexibility can also provide peace of mind and a sense of security, knowing that your living expenses are significantly reduced.

Interest Rate Environment

In a low-interest-rate environment, some may argue that investing the money that would be used to pay off the mortgage early could yield a higher return. However, this depends on one’s ability to find investments that reliably beat the mortgage interest rate after taxes are taken into account.

Personal Satisfaction and Mental Benefits of Paying Off Your Mortgage Early

The psychological benefits of being mortgage-free should not be underestimated. For many, owning their home outright provides a sense of accomplishment and reduces stress related to debt.

Early Payment Penalties

It’s important to check if your mortgage includes prepayment penalties. Some lenders charge fees for paying off your mortgage early, which could negate some of the financial benefits.

Insurance and Emergency Funds

Before considering paying off your mortgage early, ensure that you have a robust emergency fund, adequate insurance coverage, and your retirement savings are on track. It’s crucial not to leave yourself financially exposed just to pay off your mortgage sooner.

Loan Interest Deduction Considerations when Paying Of Your Mortgage Early

If you benefit from itemizing deductions, the mortgage interest deduction can lower your tax bill. However, with the increase in standard deductions, fewer homeowners find this to be a benefit worth considering.

Considering all factors, deciding whether to pay off your mortgage early is a personal decision that should align with your overall financial strategy. For personalized advice and to explore your options, schedule a mortgage consultation with the Orlicki Group. Our experts will help you understand the implications of paying off your mortgage early and how it fits with your financial goals.