3 Reasons You Might Not Want To Pay Off Your Mortgage Early
It certainly seems like a smart idea to pay off your mortgage early. After all, it gets rid of a large monthly payment, it frees up cash flow, and it stops those pesky interest charges in their tracks. What could be better, right?
The truth is the situation's a bit more nuanced than that -- at least if long-term wealth-building is your goal.
If that's the case, then it's important to think about more than just what you'd gain by paying off your mortgage -- but also what you stand to lose. Are you considering paying off your mortgage loan before it's due? Here are some reasons you might want to reassess.
1. There may be better uses for your money
Paying off your mortgage would likely save you a good amount in long-term interest. But would those savings amount to more than you'd make on the stock market? Or with a real estate investment? Or buying some crypto or a slice of the metaverse pie? That's where you have to step back and do some careful calculations.
First, exactly how much will you save by paying off your loan? From there, you'll want to think about your other options for using that big chunk of change. Here's an example: If you were to pay $100,000 of your recent inheritance to pay off your mortgage, saving $70,000 in interest over time, would that $70K outweigh potential earnings elsewhere? According to industry watchers, stocks have averaged a 9.2% annual return over the last 140 years. So if that were true -- and you invested $100,000 right now, you could potentially earn $92,000 in just a decade's time -- significantly more than the savings you'd realize from paying off your loan.
There are other investments you might look to as well -- and riskier ones could offer even bigger returns. The question you'll need to ask is how important is building your wealth (vs. just saving money) and how much risk are you willing to take on to do it.
2. You might owe a penalty
Prepayment penalties aren't as common as they were in the pre-Dodd Frank Act world, but some loans still have them. If your loan does come with one of these penalties, and you pay off the loan before you're allowed, you could face a hefty fee, usually around 2% of your loan's balance.
On a loan with $120,000 remaining, that'd mean an extra $2,400 right off the top -- a pretty large chunk of change when you're actually trying to save money.
3. It could leave you cash-dry
Would paying off your mortgage mean using all your savings or tying up all your cash in your home? Neither of these is a financially savvy move. For one, a flush emergency fund is key -- especially as a homeowner.
On top of this, tying up all your liquidity can be dangerous. If you experience some sort of costly emergency or face large expenses you weren't expecting, how would you cover them? A credit card with an 18% interest rate? While selling your home could help, that's hardly an instant option. You'd need weeks, if not months, to make it happen (and even then, you'd be out of a home).
The housing market is another factor to consider. While experts don't expect a crash anytime soon, there's always the chance another bubble will burst and home values will come crashing down. Should that happen, you could lose a good chunk (or even all) of that cash you just put in.
Take a step back and think big picture
Paying off your mortgage can obviously be a load off your shoulders, so if peace of mind and savings in the bank is your goal, then by all means, send in that check. But if long-term wealth building is more your thing, you'll want to step back and do some careful evaluations before moving forward. Would paying it off or investing make you more? Are you willing to chance the money in the hopes of doubling or tripling your returns? As with most things in investing, the answer lies in your personal goals as well as your appetite for risk.
This article was written by Aly Yale from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.
