Home Mortgage Alliance Corporation (HMAC)

Kissing your mortgage goodbye: The truth about early payoff

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Published Date 10/25/2024

Did you know that in Scotland, a house with a red door signifies the owner has paid off their mortgage? The phrase “out of the red” is used to describe this tradition.

Realtor.com’s Julie Taylor writes about how practically every homeowner fantasizes about the day their house they can make those mortgage payments a memory. However, a whopping 56.2% of Americans have an outstanding mortgage. Shouldn’t their goal be to pay it off early and invest their money elsewhere? Taylor asked financial experts for their take.

Even if you're proud of scoring that enviably low mortgage rate, completely paying off your home comes with some compelling perks — and potential drawbacks.

On the bright side, nothing beats the peace of mind of owning your home outright. As finance expert Chad Gammon puts it, "The emotional relief of owning your home can outweigh any financial advantage." Beyond the psychological benefits, you'll save significantly on interest payments over time, as noted by certified financial planner Steven Kibbel.

With no monthly mortgage payment, you'll free up substantial cash flow. Imagine redirecting that $2,000 monthly payment toward other financial goals like tackling student loans or credit card debt. Plus, unlike volatile investments in stocks or crypto, paying off your mortgage gives you a guaranteed return in the form of full home ownership, according to "Money Girl" podcast host Laura Adams.

However, there's another side to consider. Banking expert J.D. Koontz points out that you could be missing out on potentially higher returns elsewhere. If your mortgage rate is 3% but another investment opportunity offers 7%, you're leaving 4% on the table. You'll also lose the mortgage interest tax deduction, which effectively reduces your interest rate by about 1% after tax.

Property manager Odest Riley Jr. argues that a low-interest mortgage is actually the cheapest debt you'll ever have, suggesting it might be wiser to tackle higher-interest debts first. He also notes that many Americans who free up income after paying off their mortgage often end up accumulating other liabilities instead.

Surprisingly, paying off your mortgage could temporarily ding your credit score by reducing your credit mix and overall credit activity. Additionally, you'll have less liquid cash since it'll be tied up in your house, as Koontz cautions.

Before making your final decision, check if your loan carries any prepayment penalties - these could significantly reduce or eliminate the benefits of early payoff. As Kibbel advises, this highly personal decision should align with your financial goals, risk tolerance, and current economic conditions. Consider consulting a financial adviser to determine the best strategy for your situation.

Realtor, TBWS

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