3 Drawbacks of Paying Off Your Mortgage Early
Before you push yourself to pay off your home loan ahead of schedule, consider the downside of going this route.
When you get a mortgage, you agree to repay your loan over a certain period of time. That could be 15, 20, or 30 years -- or a different term that your mortgage lender agrees to. But you may, at some point, decide that you want to pay off your home loan early. Doing so could save you a lot of money on interest. Despite that benefit, here are a few reasons you may not want to pay off your home ahead of schedule.
1. You'll have less liquidity
Liquidity refers to how quickly you can access your money when you need to. Savings accounts are very liquid -- you can take a withdrawal from one when you want and get your money right away. Stocks are also fairly liquid -- you can sell a stock with relative ease for cash -- though they're not quite as liquid as savings accounts.
Homes, on the other hand, are very illiquid. You can't easily and quickly sell a home for cash. It could take months to find a buyer and wait for that deal to close. So when you pay off your mortgage early, you tie up more money in your home, leaving yourself with less liquidity, or less access to money you might need in an emergency or for another reason.
2. You'll lose a valuable tax break
Homeowners who itemize on their taxes get to deduct the interest they pay on their mortgages. And depending on your tax situation, that could be a lucrative write-off. You'll lose that deduction, however, once your mortgage is paid off, which could leave you with a higher tax burden.
3. You'll miss out on the opportunity to invest
Paying off a mortgage early can make a lot of sense when you're stuck with a high interest rate on your home loan. But if you manage to lock in an affordable mortgage rate, then paying off your loan early could mean losing out on the chance to score higher returns via investing.
Imagine you take out a mortgage with a 3.5% interest rate. If you invest in stocks over many years, you might easily score an annual return of 7%, which is actually several percentage points below the stock market's average. So in that case, putting your extra money into your home isn't the savviest move. On the other hand, if your mortgage has an 8% interest rate, then that's a different story. But if you've managed to snag a low rate, then you may want to stick to your regular payment schedule and invest whatever extra cash you have.
Many people strive to pay off their mortgages early. Along with saving money on interest, paying off your loan ahead of schedule offers the benefit of not having debt to think about. Some people really don't like the idea of debt, even though home loans are considered a healthy type to have. But before you push yourself to pay off your mortgage early, think about these disadvantages. You may decide to stick to your regular payment schedule after all.
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