A Mortgage-Free Life: What Are the Benefits of a Paid-Off House?
There are financial and psychological benefits to paying off a house, but it’s a personal choice. Before committing to paying off a mortgage early, assess your overall financial situation.
April 28, 2022
This information is provided for informational purposes only, and is not intended to be construed as tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before making financial decisions.
You’ve found a home you like, secured a mortgage from a lender and are enjoying the joys of homeownership. It’s an exciting milestone, but with it comes a home loan, which involves making a monthly mortgage payment — not everyone can pay for a home with cash and enjoy the benefits of a paid-off home.
Mortgage debt may be the highest debt payment you have to make — something to budget for every month. The thought of paying off your mortgage early may have crossed your mind, but doing it may be daunting. Homes are expensive.
Let’s do a deeper dive into the benefits of being mortgage-free and how you can financially set yourself up to take steps in that direction.
The benefits of a paid-off house
You may have heard or read stories about people living sought-after, mortgage-free lifestyles. You want to follow in their footsteps.
Paying off your mortgage early does have benefits. Here are some to consider:
You no longer need to make a monthly mortgage payment. Think of the amount of money this would free up from your budget. You could have extra money that could help pay for other bills, assuming you have a consistent income source.
You save on interest. A portion of your mortgage payment is the interest on your loan. Even if you have a low mortgage rate, you could still end up paying a lot in interest, especially when you have a home loan that has a 30-year mortgage payoff period. Think of all the interest you would save if you paid off your mortgage early.
You have one less thing to worry about. If you unexpectedly get laid off from your job, at least you don’t have to worry about how you’re going to make that next mortgage payment. You’ll still have a roof over your head. You just have to worry about making other payments such as utilities, property taxes, homeowners insurance and maybe homeowners association fees.
You enjoy extra spending power. Not paying that hefty monthly payment means you may have extra cash to spend on activities you enjoy, such as travel, entertainment or getting that sports car you’ve dreamed about.
Financial freedom, peace of mind and the idea of calling a home “my house” sound desirable, but before deciding to pay off a mortgage early you need to assess your financial and personal situation.
Paying off a home loan can involve hundreds of thousands of dollars. It’s important to think through different scenarios to determine if being mortgage-free makes sense for you.
When to consider paying off a mortgage early
Before making a lump-sum payment to your mortgage lender, determine if it makes sense for you to own your home outright. Here are some things to consider:
Your interest rate: Your mortgage interest can play a role in your decision to pay off your mortgage early. If your interest rate is higher than the prevailing mortgage interest, and for whatever reason you can’t refinance your home loan, it may be worth paying off your home loan.
Your emergency savings: The future is always uncertain, and it’s important to have an emergency fund to pay for unexpected expenses. If your savings account is healthy and has enough to cover big future expenses — e.g., medical care, education, home repairs, etc. — you could consider paying off your mortgage early.
Your retirement savings: Even if retirement is many years away, it’s important to start planning for it early by setting some financial goals. Make sure you have enough funds in your retirement accounts to support you during the years when you won’t be bringing in an income. If you have a 401(k) from your employer, consider setting up an IRA as well. If you’re confident about your retirement, you could consider paying off your home loan.
Your other debts: If you’ve already paid off your other debts, you may be in a position to pay off your home mortgage or work toward paying it off faster.
Your stress level: If making monthly mortgage payments gives you emotional stress, you might consider paying off your home. Eliminating the stress could be worth it.
Now that you know some of the benefits of a paid-off house, consider scenarios when it may not make sense to pay off a mortgage early.
When to continue making mortgage payments
Depending on your personal and financial situation, sometimes it may not make sense to pay off a mortgage early. Maybe your mortgage payment is manageable, and you have a healthy cash flow that allows you to contribute to a retirement account and have an emergency fund. If that’s the case, you may be better off continuing to make monthly mortgage payments for the following reasons:
Home loans help you build equity. The idea behind homeownership is that its value appreciates over time. Historically, real estate prices have risen, but the rate at which real estate values appreciate changes from one year to the next. There have also been periods when home prices have declined. Generally, you expect your home value to increase, and when you make a monthly payment, you build equity in your home.
Mortgage debts are different from other types of debts. There are good and bad debts. Mortgage debts fall under the “good debt” category, because it’s secured by your home, unlike credit cards, which are unsecured and carry higher interest rates. A 4% mortgage rate may be better than a 20% APR credit card debt. Assess all your debts — e.g., credit card debts, personal loans and student loans — and think about paying those debts off before paying off your mortgage.
You retain liquidity. If you pay off your mortgage in one lump sum, you may be left with little cash to take care of future unexpected expenses, such as health care, home repairs and auto maintenance. If your mortgage payments don’t stress you out, you could have better financial control when you continue to make monthly payments versus paying off your mortgage early.
The opportunity costs may be too high. Think of the opportunity costs you may be giving up if you paid off your mortgage. If you still had liquid cash, you could invest it in the stock market, add it to your retirement savings or put away money for your kids’ education. From 1972 to 2021, stocks returned 12.47% and residential housing returned 5.41%. If you invest the money in the stock market instead of using it to pay off your home, you could make a higher rate of return on your investments.
Mortgages can be inflation protected. Say you have a 30-year mortgage on your home with a fixed-rate mortgage interest rate. The principal and interest rate don’t change during the loan term, so even in inflationary times when prices are going up, your monthly payments won’t change. If they do, it’s probably because of an increase in property taxes, insurance and other payments that are incorporated into your mortgage.
You’ll avoid a prepayment penalty. Depending on the structure of your mortgage, you may have to pay a penalty for paying your mortgage early. The penalty is not common, but some lenders still include it. It’s worth making the effort to check if your loan terms include a prepayment penalty.
You may get a tax deduction. Mortgage interest payments may be tax deductible if you itemize your deductions when filing your tax return. You’ll have to speak with your tax advisor about this.
How to pay off your mortgage faster
If you think continuing to pay your mortgage makes more sense for your situation, you could consider some of these strategies to reduce your mortgage payoff period.
Make an extra lump-sum payment
Maybe you received a tax refund or a bonus from work. You could consider using some of it to make an extra mortgage payment on your principal.
Pay biweekly instead of monthly
Generally, mortgage payments are made monthly, but you could set up a biweekly plan. The benefit of doing this is that you’re paying one extra payment per year. That means building a little more home equity.
Pay extra on your monthly payment
If you have money left over after paying all your expenses, you could consider paying more than the required monthly payment toward the principal. This could help you pay off your home faster and could even save you some mortgage interest.
Decide if living a mortgage-free life is right for you
The decision to pay off your mortgage loan depends on your personal and financial situation. Consider all your assets and liabilities and weigh the benefits and drawbacks of paying off a home and being debt-free.
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