“The question, ‘Should I pay off my mortgage faster,’ unfortunately, does not have a clear-cut answer,” said Marissa Greco, a financial planner with Greco-Nader and Associates. “Before you decide, you need to thoroughly evaluate the risks and benefits involved.”
Sometimes it can make sense to pay off a mortgage quickly, but other times it doesn’t. To see what works best for your financial situation, learn more about the pros and cons of carrying mortgage debt.
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Pro: Having a Mortgage Can Help Boost Your Credit Score
It might seem counterintuitive, but having a mortgage can actually benefit your credit score — provided that you make your payments on time. That’s because one of the factors affecting your credit score is the mix of credit you have, and a mortgage can help improve that mix. “Once the mortgage is paid off, you run the risk of your credit rate dropping because you no longer have that loan,” said DeDe Jones, managing director of Innovative Financial, LLC.
Rather than paying off your mortgage quickly, you’d be better off putting extra cash toward any high-interest credit card debt — which will help improve your credit score.
Con: Your House Will Cost You More in the Long Run
When you borrow money to buy a house, not only do you have to pay back the amount you borrowed, but you also have to pay interest that accrues on the loan. The longer it takes you to pay back your mortgage, the more interest you’ll pay.
“By paying that balance off early, you eliminate years of added interest payments charged for the loan,” Greco said. “Depending on how much is left on your mortgage, this could equate to hundreds, if not thousands, of dollars in savings.”
Pro: A 30-Year Mortgage Might Leave You With More Liquidity
Opting for a 15-year mortgage or paying down a 30-year mortgage as quickly as possible might seem like a financially savvy move. But if you don’t already have an emergency fund, putting additional cash toward a mortgage is ill-advised.
“Financial planning standards state that you should have three months of expenses in cash for a two-income-earner household and six months of expenses in cash when there is one income earner,” Greco said. “If you are going to put extra cash toward your mortgage, then make sure you are still left with a cushion that will protect you. You do not want to end up house rich and cash poor.”
You can also put that extra money to work for you. “By directing extra funds to paying off your mortgage early, you lose the opportunity to earn money on investments with potentially higher returns than the amount of interest being paid on your mortgage,” Greco said. “Paying more on a mortgage that has a low interest rate may not make financial sense in the long run.”
Con: It Puts Pressure on You in Retirement
Having mortgage debt in retirement can put a strain on your savings. “By still having a mortgage to pay during these years, you put more pressure on your portfolio by taking larger withdrawals to cover the mortgage payment,” Greco said. “These larger withdrawals not only create more taxes but reduce the nest egg you have to live on.”
That’s why paying off a mortgage quickly before retirement can make sense. “To increase the chances that your money lasts through your retirement years, it is prudent to not have a mortgage payment in retirement,” she said.
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Pro: You Might Get a Tax Deduction
There’s still a tax benefit for having a mortgage. Taxpayers who itemize on their returns can deduct interest on up to $750,000 in mortgage debt. But fewer people can take advantage of this deduction now as a result of changes to the tax law.
“With the new higher standard deduction for 2019, $24,400 for married couples and $12,200 for individuals, this means less families will be able to itemize taxes,” Greco said. “Thus, if you are not itemizing, your home mortgage interest deduction isn’t worth much.”
Con: A Mortgage Creates Uncertainty in Your Life
There are several ways that a mortgage can create uncertainty, Jones said. If the housing market crashes and your home’s value declines, you could end up owing more on your mortgage than your home is worth. If interest rates rise and you have an adjustable-rate mortgage or interest-only mortgage, your monthly loan payments might become too big for you to handle.
“There are some folks who can’t live with uncertainty,” Jones said. For those people, paying off a mortgage quickly — or avoiding housing debt altogether — might make sense, she said.
It’s worth noting that if you’re worried about how your mortgage will be paid if you lose your job or pass away, don’t feel compelled to get mortgage protection insurance. It’s an expensive way to provide yourself with a sense of certainty. You’d be better off getting an ample life insurance policy and building an emergency fund.
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