Advantages And Disadvantages Of An Early Mortgage Payoff

Paying off a mortgage early is a popular option in today's economic climate. What are the advantages and disadvantages of an early mortgage payoff? This question is much discussed as we see below.

A large advantage of an early mortgage payoff is the feeling of freedom that comes with being debt-free and owning your home outright. This piece of mind is priceless to people and therefore many opt for an early mortgage payoff. Not having a mortgage payment or the dreaded mortgage protection insurance will most likely also mean significantly less stress in your life. One need not have to worry as much about losing their job, for instance or thinking that they are paying too much for their property when it is declining in value.

Another advantage of an early mortgage payoff is the money you will save on interest payments to the bank or building society. This return is risk-free and guaranteed.

An argument against this is that mortgage interest payments are lower than on other loans and investments and they are also tax deductible. This tax deduction equates to considerable savings for some homeowners. If you pay off your mortgage, you'll lose the interest deduction which means that the return on your saved interest payments will be less.

Losing the opportunity to invest elsewhere is a major downfall of prepaying your mortgage. With an early mortgage payoff you will have less money to help grow your investments. If the interest rate on your mortgage is low, you may be able to earn more by investing in higher-rate earnings products. For example you may save interest rates of 6% by prepaying your mortgage but you may be able to earn 12%+ through investing in stocks or bonds. Remember though that the financial market can be volatile and in bad economic times or when interest rates are in decline you may want consider prepaying your mortgage.

You also have to pay taxes on any investment returns you earn so this is another thing to consider when deciding to invest instead.

Inflation is another reason not to pay off your mortgage early. When you owe money and you pay back over the course of many years what you pay in say, 20 years time is worth a lot less than its current value. By paying off your mortgage you will lose this advantage.

By paying off your mortgage early you could put yourself at risk by putting all your eggs in one basket. This essentially means that you are putting all your money in real estate. Real estate, like other investments can rise and fall in value. If it declines in value you are exposed to this financial risk. By diversifying and investing in other products you will reduce this risk. You also retain more liquidity this way, ensuring you have funds in times of potential financial hardship.

Ultimately, the question of whether to pay off your mortgage early has no correct answer. You need to look at your own financial situation and your goals. Things to look at are how long you plan to stay in your current house, whether owning a home or having financial security is more important to you, your other debts, your insurance needs, the length of your mortgage and the rate of interest you pay on your mortgage loan.

About Author:
Making the right choice with early mortgage payoff is not always a black and white issue. Things like high interest rates or annoying mortgage protection insurance may make the decision for some easier than others. In the end it comes down to personal preference.

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