Since the Tax Cuts and Jobs Act of 2017 doubled the standard deduction, most people don’t itemize their deductions. This change is most likely to affect you if you have a large mortgage, a high interest rate-or both-and your annual interest payments are substantial. If you pay off your mortgage early, you’ll no longer have any mortgage interest to deduct on your tax return if you itemize your deductions. Tax Implications of Paying Off a Mortgage Early For example, if your mortgage rate is 3.5% and your portfolio earns an average of 6% per year, you’d lose money by using extra funds to pay off the loan early. If you have the opportunity to invest your money for returns that are significantly higher than your mortgage rate, you’d be better served doing that than missing out on compounding earnings to get rid of your mortgage faster. Could miss out on higher returns from investing.It’s usually recommended to save up enough to cover three to six months’ worth of expenses so you can manage any unexpected costs without having to go into debt. If you’re going to focus on paying off your home loan early, it’s a good idea to make sure you have an adequate emergency fund first. Putting all of your money toward your mortgage can also cut into what you can set aside in savings. This is because these other types of debt likely have higher interest rates. If you have credit card or student loan debt, funneling your extra cash toward paying off your mortgage early can actually cost you in the long run. Paying off your loan will increase the amount of equity in your home, which you could tap into with a home equity loan, home equity line of credit (HELOC) or cash-out refinance.ĭisadvantages of Paying Off Mortgage Early By paying off your mortgage early, you’ll free up cash to spend on more exciting things when you’re a bit older, such as travel. That’s a long time to be saddled with loan payments. The typical mortgage lasts 15 to 30 years. Depending on the loan amount, interest rate and original term, paying your mortgage off early could result in significant savings. By reducing the length of time you spend making mortgage payments, you’ll cut down the amount of interest you pay over the life of the loan. Benefits of Paying Off Your Mortgage Early Whether the pros outweigh the cons will depend on your overall financial situation. There are pros and cons to paying off your mortgage early. But if you really want to know if it’s a good decision, you have to look at the math. Of course, it would feel great to rid yourself of a huge financial burden like a mortgage. Just because you can pay off your mortgage early doesn’t necessarily mean that you should. The key to paying off your mortgage early is by applying extra payments to the principal. This is known as amortization, and it allows the lender to make back a larger portion of their money within the first several years of repayment. As time goes on, more of the payment goes toward paying down the principal. Early on in the loan, a large portion of that payment is applied to interest. When you send in your monthly check to your mortgage lender, the payment is split between principal and interest. Not to mention, it feels good not having a monthly mortgage payment to worry about. Can You Pay Off a Mortgage Early?īecause mortgages tend to be large loans that last for a couple of decades or longer, paying off the loan early can save you tens of thousands of dollars in interest. Here’s what to consider before paying off your mortgage early. If you have the extra cash, should you go ahead and pay off the loan ahead of time? Maybe. So it’s no wonder if you dream of the day that monthly mortgage payment is gone for good. Your house is probably the most expensive purchase you’ll make in your lifetime.
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