Pros and Cons of Paying off Your Mortgage Early

Although paying off any debt is usually wise, when it come to mortgage loans, there are benefits and drawbacks.

Mortgage Loans are Different

Unlike any other debt, a mortgage loan is far more long-term, usually for 30 years, and, if one’s credit score was good when the debt originated, the interest rate may be lower than any other more short-term debt an individual may incur. The decision to pay off the mortgage early may be an attractive option if the money is available to do so, but one should consider both sides of this action before making a decision.

Benefits of Mortgage Payoff

The most important benefit of paying off a mortgage early is that one relieves him/herself of a monthly payment forever. This can be particularly attractive for individuals getting ready to retire and facing life on a fixed retirement income. If there is enough to pay off the mortgage and still have enough monthly income to be comfortable, a mortgage payoff may indeed be a wise choice. Another important factor may be that enough will need to be set aside to pay taxes and insurance if these were formerly included in the mortgage payment.

Another benefit of paying off a mortgage early is that the debt will show as paid on one’s credit report. This will result in an initial rise in overall credit score, because a large debt has been eliminated.

There is also the feeling of well-being in the knowledge that one’s home is owned free and clear. Having a significant asset, the equity in which can be used should an emergency or significant financial crisis occur, allows a peace of mind that can guarantee a peaceful night’s sleep.

Drawbacks of Mortgage Payoff

It is difficult to imagine any drawback to paying off a debt, but in the case of a mortgage, there are three.

1. When a mortgage is paid off early, the initial effect on one’s credit score is a healthy spike. This spike is, however, a one-time event. When the loan is paid off, it then becomes reported as a “closed account” on a credit report, and will not then continue to positively affect a credit score. The “tradeline” is no longer reported, and part of a good credit score involves payments that are me on time, over time. If an individual does not have enough “tradelines,” (3 is usually the minimum that a potential creditor wants to see) due to a mortgage payoff, it may be difficult to obtain future credit.
2. The other drawback is the obvious one of tax deduction. Individuals who itemize deductions on their tax returns have the annual deduction of mortgage interest. No longer having this deduction can place an one in a higher tax bracket and thus result in an overall higher tax rate and bill.
3. If the mortgage loan interest is very low, it might not be advisable to pay off the debt early. One must weigh the interest rate on the debt against the interest being earned on the funds to be used to pay off the mortgage. If the mortgage interest rate is really low (and there are still some 3-4% mortgage loans out there) and the interest being earned on the money to be used for the payoff is greater than the mortgage loan, it simply does not make sense to payoff the mortgage.

The Reverse Mortgage Option

For seniors, there is also the option of a reverse mortgage, if additional cash is needed for retirement living. In this instance, a conventional mortgage loan may be paid off, and a new mortgage loan placed on the property for which no payments must be made during the borrower’s lifetime. This is a viable option for seniors who would like more retirement income without any additional monthly payment.