5 Reasons Not to Pay Off Your Mortgage Early

As a responsible debtor, you may be tempted to make extra payments on your mortgage. However, this might not be the best idea, depending on your current financial situation. In fact, there are a number of reasons not to pay off your mortgage early. Whether it’s due to the fact that you have other debt or haven’t saved enough in other areas, you may want to rethink your decision. Here are just five reasons not to pay off your mortgage early.

You Have Credit Card Debt

Mortgages have better rates than credit cards. Why pay down a mortgage that has 5% interest when you have credit card debt that carries an 18% interest rate? If you’re carrying credit card debt, you need to pay it off first before you even think about paying off your mortgage early.

You Don’t Have an Emergency Savings Account

It doesn’t do you much good to get ahead on your mortgage when you don’t have an emergency savings account. It doesn’t matter how great your job is; things happen. It might not even be layoffs at your company; it may be an accident that leaves you disabled or out of work for several months. You need to have at least three months’ salary in your savings account. Start with a goal to save a thousand and then go from there.

You Aren’t Putting Enough Towards Retirement

You may be putting a large percentage of your check into a 401(k), but you also have other options. For example, you could also be saving money away in an IRA. Consider all your retirement options before trying to pay off your mortgage early.

You Don’t Have a College Fund for Your Children

While paying off your mortgage early may seem like a great thing, you need to have all your finances in order first, and this means having a college fund set up for your children. A 529 plan allows you to earn tax-free interest and is a great way to save for your child’s education.

You’re Throwing Money Away

Why put the extra money from your paycheck towards paying down your mortgage when that money could be earning interest? The money you pay ahead on your mortgage gets a 0% return. However, if you put that money into a retirement fund or even a regular savings account, you will earn interest. It may not be much, but it’s better than nothing.

What happens when my mortgage is paid off?

When you pay off your mortgage, several significant things happen, marking the end of your loan term and a major milestone in your financial life:

  1. Certificate of Title and Lien Release: Once the final payment is made, the lender will prepare a document known as a lien release or a mortgage discharge. This document is proof that you have paid off your mortgage in full and that the lender no longer has a lien on your property. In many jurisdictions, this document needs to be filed with the local government office, such as the county recorder, to update the public land records, officially removing the lender’s claim on your property.
  2. Receipt of the Original Title: Depending on where you live, you might receive the original title of your property. This document shows that you are the sole owner of the property, free and clear of any mortgages.
  3. No More Mortgage Payments: Obviously, you will no longer have to make monthly mortgage payments. This frees up a significant portion of your monthly budget, which can be redirected to savings, investments, or other expenses.
  4. Property Tax and Home Insurance Responsibilities: If your lender was handling your property tax and homeowners insurance payments through an escrow account, these responsibilities now fall entirely on you. You’ll need to make sure to pay these directly to ensure your property is protected and you remain in good standing with tax authorities.
  5. Possible Change in Tax Deductions: If you were itemizing deductions on your income tax returns and deducting mortgage interest, this deduction will no longer be available. This may change how you file your taxes and your tax liability.
  6. Increased Cash Flow and Financial Stability: Paying off your mortgage can significantly improve your monthly cash flow. This can provide more financial stability and flexibility, allowing you to pursue other financial goals like retirement savings, investments, or even a new property purchase.
  7. Emotional Impact: Finally, there’s a significant emotional and psychological benefit. Owning your home outright can provide a sense of security, achievement, and peace of mind.

It’s also a good idea to check with a financial advisor or a tax professional to understand the full implications of paying off your mortgage, especially regarding your personal financial situation and potential tax implications.

The simple truth is it may not make financial sense to pay off your mortgage early. However, if you find that you’ve covered all the bases and still have money left, you may be able to pay ahead on your mortgage, but why do so? Save or invest that money so that you get a return.

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An associate editor, working in tandem with global teams while residing in Minnesota. She has a strong interest in economic growth and holds board positions in various non-profit organizations.

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