Pros and Cons of Paying Down Your Mortgage

by | BiggerPockets.com

Should you pay down your mortgage more aggressively? This is something that’s asked a lot on BiggerPockets, and rightfully so—it’s a great question.

There is no right or wrong answer here. It all depends on your short- and long-term financial goals.

The fact is there are pros and cons to paying down your mortgage. In this post, I’ll discuss the amortization schedule, payment schedule, and impact of paying down your mortgage faster. I’ll also discuss the effect it can have on your taxes.

With this knowledge, it’s my hope you can create a well-informed strategy about whether or not to aggressively pay down your mortgage.

Related: 30 Year Mortgage vs. 15 Year Mortgage… Which is Better?

Building Wealth: The Pros and Cons of Paying Down Your Mortgage

Most, but not all, of this information will apply to both your home and to rental properties. Your mortgage payment is broken down into two parts: the portion that goes toward your principal and that which goes toward the interest on the loan. (Some mortgage statements also have another line item called “escrow,” but I’m not going to talk much about that today.)

Whether or not you want to pay down your mortgage quickly is largely dependent on whether you’re focusing on immediate personal cash flow or long-term wealth building.

If you’re paying your mortgage down aggressively, you’re paying more of the principal. Most mortgages are set to get paid down over an amortization schedule, which is somewhere between 15 to 30 years.

In the beginning, you’re heavily paying off the interest. But as the years go by, you’re paying less and less interest because you owe less money on the loan overall.

So, those who add in an extra payment amount on the top of what they owe monthly are essentially paying off more of their principal upfront, decreasing the amount of interest they’re paying in a shorter timeframe.

Pros of Paying Off Your Mortgage Faster

By paying off your mortgage quicker, you’ll own the property free and clear sooner. And without a mortgage payment, you’ll be cash flowing a much higher amount (that is, if it’s a rental property).

If real estate investing is not your full-time gig (it’s more so passive income), it’s beneficial in the long term to pay off your mortgage faster. Then, when you retire, you’ll be generating a higher amount of income off those rental properties that you own outright.

Another thing to consider is that five or so years into your mortgage, the bank is likely to change the interest rate on your loan. Maybe it will go up; maybe it will go down. The faster you pay off your principal by adding a little extra on top of what you owe each month, the more you’ve given yourself  a little hedge when the bank comes around and changes your rate.

Cons of Paying Off Your Mortgage Faster

There happens to be no tax advantage to paying down your mortgage faster. The only part of your payment that’s tax deductible is the interest portion. The more principal you pay and the more cash you’re flowing, you’re going to be paying more in taxes.

And if you’re looking to live off the income of your rentals, you’re probably not going to be able to throw additional cash toward your principal. You need that income to live off instead.

Finally, as opposed to ramping up your principal pay down, if you need to make a certain amount from your properties to use as personal income, you can do something called an interest-only mortgage. This reduces your monthly payment significantly.

Granted, an interest-only mortgage also increases the amount of your loan in the meantime. But if you bought when the market was good and the property value goes up over time, you’ll be in good shape and cash flow more money in the meantime. (However, investors should obviously exercise caution, because the exact opposite situation could unfold and be financially devastating.)

For more information, watch my video above, where I go into more details about these concepts.

What questions do you have?

Let’s discuss in the comment section below. 

About Author

Matt Faircloth

Matt Faircloth, Co-founder & President of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, is a developer and owner of commercial and residential property with a mission to “transform lives through real estate." Matt, along with his wife Liz, started investing in real estate in 2004 with the purchase of a duplex outside of Philadelphia with a $30,000 private loan. They founded DeRosa Group in 2005 and have since grown the company to owning and managing over 370 units of residential and commercial assets throughout the east coast. DeRosa has completed over $30 million in real estate transactions involving private capital including fix and flips, single family home rentals, mixed use buildings, apartment buildings, office buildings, and tax lien investments. Matt Faircloth is the author of Raising Private Capital, has been featured on the BiggerPockets Podcast, and regularly contributes to BiggerPockets’s Facebook Live sessions and educational webinars.

8 Comments

  1. Ashley Pimsner

    Rich Dad would say paying off your primary home (aka liability) is not the way to go.
    I know everyone dreams of owning their homes free and clear, but you still have to pay for insurance, real estate taxes, utilities, maintenance etc. which makes your primary home a liability.
    It would be better to use extra cash and buy income producing properties which are assets and pay you each month.
    I too have struggled with throwing my existing cash flow to pay down my primary or to pay down a multi-family, but ultimately decided to pay down rental, so I get maximum cash flow at retirement.
    I have also used an interest only loan to help artificially increase cash flow on a condo right before the housing crisis in 2008.
    I took out a 7 year interest only that allowed me artificial cash flow (because I wasn’t paying principal) averaging $1000 a month for 6 years while my condo was 125k upside down, and that allowed me to weather the storm while others were getting foreclosed on or doing short sales. Ultimately I sold condo fsbo to existing tenant and did a 1031 exchange into a small apartment building-talk about turning lemons into lemonade.
    Matt, I think you misspoke when you mention doing an interest only loan increases your mortgage balance. The mortgage balance remains the same (unless you are folding in closing costs) and does not change until you pay more than the interest only payment.
    Great article and content as always Matt.
    Wishing you continued success.

  2. Katie Rogers

    You wrote, “The only part of your payment that’s tax deductible is the interest portion. The more principal you pay and the more cash you’re flowing, you’re going to be paying more in taxes.” You have to do the math to figure out what is going on in taxes. Yes, if you pay down principal, you will not have so much interest to deduct, but remember your tax savings is only a fraction of the interest deduction. If your effective tax rate is 25%, then if you pay $10,000 in interest, you will save $2,500 in taxes. However you have still paid $7,500 in interest.

    When you pay down principal, you effectively “save” that principal as equity in the house, AND save tens of thousands of dollars in interest because interest is calculated only on the outstanding principal balance. If you do not pay down the mortgage, you will still pay that interest. If you are talking about your personal residence, eventually your interest will no longer exceed your standard deduction, and then there is no tax advantage to paying interest anyway.

    Sure you will pay taxes on your cash flow. If that $10,000 net interest is actually your annual cash flow, at the same 25% effective tax rate, your tax is $2,500, AND you get to keep the $7,500. Another advantage of paying down your principal more quickly is you can maximize your potential HELOC amount and put yourself in a position to offer cash on the next property (keeping in mind that you will owe on the HELOC).

  3. Eric Carr

    Agreed, depends on ones goals. But a new consideration is the SALT cap! Might make sense to pay off some of your owner occupied property’s principle – if you are above the cap. I agree with Kiyosaki in some circumstances and not in others – your house is not always a liability. You have to pay to live somewhere!

      • Katie Rogers

        Of course, anytime you pay extra principal, you have to evaluate if you can afford to pay extra principal. Also, after your extra principal has accumulated to a certain level, you can ask that your loan be “recast.” There is generally no charge for a recast, and a recast will result in a reduction of the required monthly payment, making it easier to pay your bills going forward.

    • Kevin Polite

      Your point on SALT is right on as I was hit with that this year and vowed to definitely pay down the mortgage early. those that are actually near or in retirement you can’t put a price on the happiness and satisfaction of not having a house note. Here’s a good article on a couple that had the financial means to pay off their mortgage early https://www.ajc.com/business/wes-moss-how-head-into-retirement-with-mortgage/mnPWVbJGITSzfHW7sLvXJP/

      Also, the answer whether to pay off mortgage should be “depends.” There is no one answer. Each situation is different. If you have excess funds beyond your living expenses and retirement why not pay if off early. If not, it may not make sense. I know friends in retirement that have 10 more years left and they hate it. The ones that paid off early have a greater sense of financial stability.

    • Ron Takeda

      I just did my taxes and was capped off. When I entered property tax and interest for my home the bottom line didn’t change. But on rentals the property taxes and interest benefited the bottom line. So I was thinking the home I live would be the one to pay off without any downside.

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