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Paying off your mortgage early may seem like a great idea After all, who wouldn’t want to own their home free and clear and stop making payments?
While it’s an admirable goal, it’s not always the best financial move. Here are seven reasons you may want to think twice before putting extra money toward your mortgage.
1. You Could Earn More Investing Elsewhere
One of the biggest reasons not to pay off your mortgage early is missing out on potential investment returns.
For example, historically the stock market has returned about 7-10% annually when adjusted for inflation. That’s greater than the interest rate on most mortgages, which currently average around 3-6%.
So if you put extra money toward your mortgage instead of investing, you give up the chance to earn a higher return over the long run Those lost investment gains can really add up thanks to compound interest.
Of course, investment returns aren’t guaranteed like mortgage interest savings are. But if you have a long time horizon, like 20+ years until retirement, investing gives you a good chance to come out ahead.
2. You’ll Lose Your Mortgage Interest Tax Deduction
Here’s another reason paying off your mortgage early could cost you: losing your mortgage interest tax deduction.
If you itemize deductions on your tax return, the interest you pay on your mortgage is usually tax deductible. This lowers your taxable income and could save you thousands per year.
Once your mortgage is paid off, you lose this deduction and your taxable income goes up. For some homeowners, the tax savings are significant enough that they’d rather keep their mortgage than lose the write-off.
3. You May Need Liquidity in the Future
Tying up all your extra money in your home reduces your liquidity—how easily you can access cash when you need it.
Let’s say you pay off your mortgage, then have a large, unexpected expense like medical bills or home repairs. Without cash reserves or liquid investments, you’d have to take out a loan or line of credit.
Whereas if you kept your investments liquid and continued making mortgage payments, you’d have quick access to funds if an emergency came up.
4. You Could Be Behind on Retirement Savings
Another reason not to zero out your mortgage: you may need to play catch-up on retirement savings instead.
Financial experts recommend saving 10-15% of your income for retirement annually. But many people fall short of that goal.
If your retirement accounts aren’t on track, it may be smarter to direct extra funds there rather than your mortgage. Retirement savings grow tax-deferred and compound over decades, which can add up to much more money.
5. You Have Other Debts or Goals
You may have better uses for your extra money than paying off your mortgage early. Here are some examples:
- Paying off high-interest credit card, auto or student loan debts
- Saving for your child’s college education
- Starting an emergency fund
- Saving for a down payment on investment property
- Funding a dream vacation
Don’t rush to pay off a low-interest mortgage if it means sacrificing other important goals. Prioritize where your extra money goes based on your timeframe and earning potential.
6. You Plan to Move Soon
Paying off your mortgage early makes less sense if you plan to move in the next few years. You likely won’t stay in the home long enough to recoup the added costs.
Here are two scenarios to consider:
Moving in 1-2 years: Don’t make extra payments. Save your cash for the new down payment instead.
Moving in 3-7 years: Make modest extra payments to pay down a bit faster. But don’t pay off the full balance.
Either way, wait and fully pay off the mortgage on your next home where you plan to stay long term.
7. You May Need to Borrow Again
Lastly, think about whether you might need to borrow against your home equity in the future.
Maybe you’ll want to remodel, need it for college costs or medical bills, or start a business someday. Accessing your equity will be harder once your mortgage is gone.
That’s why some homeowners intentionally keep a mortgage even when they could pay it off. Having available equity gives them a source of funds to tap if needed.
Should You Ever Pay Off Your Mortgage Early?
Despite the drawbacks, paying off your mortgage early can still make sense in some situations:
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You have plenty of cash reserves on hand.
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You’ve maxed out other tax-advantaged savings accounts.
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You’ll retire soon so have a short investing timeframe.
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Your mortgage rate is very high compared to today’s rates.
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You value being debt-free more than maximizing wealth.
The key is weighing all factors—not just potential interest savings but tax benefits, time horizon, liquidity needs and your goals.
For many homeowners, continuing regular mortgage payments while directing extra money into investments or other priorities works out better in the long run. But you have to run the numbers for your own situation.
Either way, make sure it aligns with your overall financial plan and long-term best interests.
The Bottom Line
Paying off your mortgage early seems noble on the surface. But the smarter financial move is often continuing your regular payments and using extra funds in ways that maximize returns and keep your options open.
Don’t rush into paying off your home loan without considering the trade-offs. And remember—a paid-off mortgage doesn’t mean you’ve “made it” financially. True financial success comes from balancing all aspects of your money management, not just becoming mortgage-free.
What to consider before early mortgage payoff
Investing has no guarantees, but according to some experts, it often makes more sense than funneling your money into your mortgage.
“Sadly, the math tells us it’s almost always better to invest in other places than in your mortgage,” says Richard Bowen, CPA and owner of Bowen Accounting in Bakersfield, California.
Case in point: Current mortgage rates are still somewhat lower than long-term stock market returns. On average, the S&P 500 has returned 10 percent over the last 90 years.
However, that S&P average ignores volatility in returns. While you might see a 10 percent appreciation over the long term, you could see a year, five years or more with much lower returns. For many people, that’s a compelling reason to pay off debt instead.
“The thing is, no one can give you a guarantee on an investment,” Bowen says. “You can put your money in the stock market and lose it. You can put your money in real estate, and it doesn’t perform as well as you expected it to.” Learn more:
How will you use the money if you don’t pay off your mortgage early?
Be realistic about what you’ll likely do with your money if you don’t use it to retire your mortgage debt. After the mortgage is paid off, will you actually use it to get ahead?
It might make sense, for example, to pay off your mortgage early if you struggle with keeping money in the bank. Your home can be a forced-savings tool, and making extra payments can save you thousands of dollars in mortgage interest over time, plus help you build equity in your home more quickly. Estimate your payoff:
“The right thing to do is the thing you will do,” Bowen says. “All of this has to do with personal habits. If you’re going to blow through the extra money anyway, then it’s better that you put it into your house than spend it.”
If you decide it’s not worth paying off your mortgage, think about how you’ll put that money to use. For example, you might:
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FAQ
Are there disadvantages to paying off a mortgage early?
Cons. Miss out on investment gains: One downside to paying off your mortgage early is missing out on the potential growth that money could earn elsewhere. For example, the S&P 500 has returned 11.95% annually over the past 50 years, or roughly 8% when adjusted for inflation.
Is it worth paying a mortgage off early?
Paying off a mortgage early can save you interest and increase cash flow, but it might mean missing out on higher investment returns and losing tax benefits. With rental income, you could pay the mortgage faster, but it’s good to keep some money liquid for other needs or emergencies.
What is the 2% rule for mortgage payoff?
Why should you not pay off your mortgage?
- 1) You lose your mortgage interest deduction.
- 2) You lose a low borrowing cost.
- 3) You tie up capital in an illiquid asset.
- 4) You decrease your financial returns.
- 5) You might start being less efficient with your time.
- 6) A chance your credit score might take a hit.