Mortgages & Creative Financing

The Advantages and Disadvantages of Paying Off Your Mortgage

Expertise: Landlording & Rental Properties
61 Articles Written
stockbroker-managing-money

Mortgages are the most common personal debt in the U.S. Why? Because if you cover your mortgage based on the type of loan, generally, you will finance 80% of the home price. However, the sum of the mortgage is not only the price of the house, but the interest to be paid on the mortgage itself.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

Everyone who has been through the pension registration process knows there is much to consider: investing, saving, anticipating medical expenses, etc.

There’s a question many people ignore: “Do I have to pay off my home mortgage before I retire?” The response is more complicated than you might think.

Advantages of Paying Off Your Mortgage

1. Peace of Mind

It’ll feel good to know that you no longer owe the creditor payments.

2. Less Money Down the Drain

Enjoy savings in your pocket instead of spending money year after year on home interest payments.

3. Financial Freedom

After paying off your mortgage—unless you have other debt—you have the financial freedom to pursue other activities, like starting another business.

4. Security

Eliminating mortgage balances significantly reduces the risk of losing your home in the event you lose your job or experience unforeseen health problems.

Related: 5 Reasons I’m Obsessed With Paying Off My Mortgage

5. Reduced Reliance on Uncle Sam

There is no guarantee that the tax deduction for the payment of interest and commissions will not be canceled over time.

6. Boost Savings

By not having a mortgage payment, you’re able to save even more. You can deposit additional money in a savings account, invest in diversified asset classes, and so on.

7. Mitigate the Unstable Real Estate Market

One of the biggest concerns for most homeowners, especially when recalling the Great Recession, is the effect an unstable real estate market can have on homeowners. The ability to keep up with mortgage payments during a severe financial crisis can be a massive burden.

Disadvantages of Paying Off Your Mortgage

paying-off-mortgage

1. Lesser Liquidity

Keeping the mortgage and the money you could use to retire, you create an ideal personal account balance. Yes, it'll be one with different obligations (your mortgage), though equally one with multiple assets (cash). Eliminating the cash loan also limits your tendency to cope with unexpected expenses or investment opportunities.

2. Inflation Hedge

It will be paying off your current mortgage in future dollars, which will actually cost you less in real dollars for years to come. For example, if annual inflation is only 2% in the next 15 years, the last payment of $ 1,000 for a new 15-year fixed-rate mortgage will now only cost $743.

3. Less Mortgage Interest 

Those nearing retirement are more likely to pay less mortgage interest, perhaps so little that mortgage interest and other price discounts, plus other deductions, are no more than standard deductions. (According to the Pew Charitable Trust analysis, less than half of all borrowers use reduced interest on mortgages.)

Related: 3 Reasons to Consider NOT Paying Off Your Mortgage

4. Borrowing Costs

When you chose to borrow against your home that has been repaid in the future, like paying off a new mortgage, it can be much more expensive. Interest rates, which have touched lows for more than four years, may start to rise in the coming years. A 4.5% increase in January interest rates on a $ 30,000 30-year mortgage with a single percentage point results in monthly payments of more than $128. Other types of loans, such as a basic home loan, generally charge a higher interest rate than a traditional mortgage.

5. Opportunity Cost

Even when you see your home as an investment—even if it is not liquid—the increase in the value of long-term residential properties follows other native portfolio investments. For instance, historical property returns are lower than stocks (not mentioning bonds at the investment level after 1970s).

Before the housing bubble and ensuing crisis, domestic property prices rose by about 6% between 1975 and 2002, compared to a 14% return on equities. If you transfer this money to your account at brokerage, it will most likely happen in 10 years.

What are your reasons for paying off—or not paying off—your mortgage?

Share with a comment below!

Trey Duling is the President/CEO of OrlandoVacation.com, a large travel company specializing in Florida getaways. He has over 27 years of experience in the area, owning multiple companies that market to guests looking for an Orlando vacation. His main focus is marketing hotels and short-term vacation rentals near Disney World, with ample expertise as the largest authorized ticket seller for the large attractions in Orlando.
    Jerry Rien Rental Property Investor from Scottsbluff, NE
    Replied 6 months ago
    Funny, when i had my mortgages, i was always just scraping by trying to pay bills. Once i paid them off, i found i had more money to spend on the things that mattered. As far as opportunity costs, i can now come up with a down payment more quickly, and i dont have to worry about borrowing from a bank if need be, as my debt to income is now in single digits. Funny how the banks tried using the same logic once i had paid debt off, as all the money i make now enriches me and not the bank.
    Kevin Vitali from Tewksbury, Massachusetts
    Replied 6 months ago
    With today's incredibly low rates on home mortgages, I think you should take a look at what kind of after-tax yield you can get on another investment. For example, if your mortgage is 3.5% and you can invest in a fairly low mutual fund or index with an after-tax yield of over 8%, maybe you are better off investing your extra cash somewhere else vs. paying down your mortgage. Of course, there are many other considerations. How close you are to retirement, your risk tolerance, etc...
    Lewis Christman Financial Advisor from Macungie, PA
    Replied 6 months ago
    While true in theory just understand those investments can go down. More reward (8%) equals more risk. Paying off 3.5% is a guarantee of earning 3.5% however I would suggest paying on the higher interest credit cards first.
    Kevin McGuire Rental Property Investor from Seattle, WA
    Replied 6 months ago
    I hate having debt and I used to be very modest in how much mortgage I’d take on and would try to accelerate paying it off. Probably biggest financial mistake I’ve ever made. Now I view it through the lens of leverage. The purpose of leverage is to accelerate return while taking on risk. Mortgages happen to be a great risk adjusted return, as evidenced by the fact that a bank is willing to loan to 80%. Compare this with a margin loan on equities where typically they’ll call at 50%. If your rate of return is greater than the interest rate, you win, and it’s almost always true that your return on real estate or stocks will, over the long term be greater than your mortgage rate. As you build dormant equity you may sleep better (which has intrinsic value) but you’ll be further behind net.
    Lewis Christman Financial Advisor from Macungie, PA
    Replied 6 months ago
    Not sure I buy the inflation hedge. $1,000 dollars out of my pocket is still 1.000 out of my pocket.
    Matthew Wilp
    Replied 6 months ago
    There is a huge tax benefit to paying off your mortgage before retirement as well. If living off of investments in retirement you can potentially sneak into a lower tax bracket by lowering the amount of capital gains and earned income you need to realize per year. In particular, long term capital gains are taxed at 0% under $78,750 earned income for married, filing jointly or half that if single.