It’s not always easy to weigh the pros and cons of making an important financial decision. Luckily, there are plenty of ways to look at every aspect of your mortgage, including paying it off early. In this article, we’ll take a look at some of the reasons why you might want to pay off your home loan and how paying it off sooner can help you.
In this guide, we review the Cons Of Paying Off Mortgage Early, at what age should you pay off your mortgage, benefits of a paid off house, and life after mortgage is paid off.
Cons Of Paying Off Mortgage Early
There are many people who would like to pay off their mortgage early. If this is you, then you’ve come to the right place! In this article, we’ll take a look at some of the reasons why you might want to pay off your home loan and how paying it off sooner can help you.
There is a better usage for the money
There are many ways to use the money that is being paid towards your mortgage. If you are not paying the entire amount of your mortgage and you have a significant amount of equity, an investment property may be a good option for you. If you have other debts that have higher interest rates, it’s likely that using a portion of your monthly payment to service those debts will save more money in interest over time than paying off your mortgage early.
Another way to put this money to use could be funding college for children as well as yourself. Rather than borrowing from a bank at high interest rates, putting away some extra cash towards education can potentially save thousands in interest over time – making this strategy even more beneficial if the person getting their degree has low-income earning potential after graduation (e.g., nursing).
You can’t monetize your mortgage interest
When you pay off your mortgage, you lose the ability to take advantage of the tax benefits associated with it.
You can get a tax deduction for interest on your home loan if you itemize deductions, but only if that’s your only debt and you don’t use a HELOC or credit card. For example, let’s say that you owe $200K on a 30-year fixed-rate mortgage at 3.5%. Your monthly payment is $1,842 ($200K divided by 360 months). You also have no other debt besides some student loans and a few hundred dollars in credit card balances. You’re paying down those student loans aggressively as well so eventually they’re gone as well—but for now we’re just looking at the situation with this one remaining debt: The mortgage.
Homes are usually exempt from capital gains taxes too! This means that when you sell (or “exchange”) homes within 2 years of purchase or construction completion date (whichever comes first), any profit made off of selling would not be taxed by Uncle Sam—it would be considered like rent payments.
Interest rates are low
If you’ve been thinking about paying off your mortgage early and rates are low, refinancing might be a good option for you. Refinancing is when you take out a new loan to pay off an old one. You can do this even if you’re still making payments on the original loan. The new loan will have better terms than the old one, which means it’ll likely come with lower interest rates and fees.
If done right, refinancing can save you thousands of dollars over time—and depending on how much cash is available in your budget each month (and how many years remain until your mortgage comes due), it could help speed up the process of paying off your home earlier than expected!
A home equity line of credit (HELOC) exist
One way to pay off your mortgage early is by taking out a home equity line of credit (HELOC). This type of loan allows you to borrow against the value of your house. It’s usually repaid over 15 or 30 years, but unlike a home equity loan, HELOCs often have variable interest rates that change periodically.
If you don’t have any debt on your house, there’s no penalty for taking out a HELOC and using it to pay off your mortgage faster. However, if you’re considering using this option and are currently making payments on both your original mortgage and a HELOC at the same time (or within five years), then you’ll likely be hit with an early payment fee.
at what age should you pay off your mortgage
A report from the Federal Reserve Bank of New York states that Americans hold $8.88 trillion of mortgage debt. It is reported that it is the biggest type of household debt in the country. If you are among the millions of people in this debt, you may be wondering whether you should pay early or not.
At What Age Should You Pay Off Your Mortgage?
While some experts say that you should pay your mortgage at about the age of 45, some other experts do not agree. They say that are some drawbacks associated with paying off mortgages early and ignoring some other investments that are potentially lucrative such as bonds and stocks.
So if you are wondering what you should do about your mortgage, this guide will put you through and weigh the ups and downs, so that you can decide.
Why You Should Not Pay Off Your Mortgage Early
You still have other debts to take care of
In most cases the last debt you pay should be the mortgage. If you have other debts hanging, tackle them first. Typical debts are;
1. Car Loans
Almost all car loans come with interest rates that are more than mortgages at current rates. The interest on a car loan is not tax deductible.
2. School Loans
There isn’t really any advantage paying off your mortgage early especially if you have refinanced your school loans or taken advantage of some repayment plans. Rates are higher than a mortgage even with refinanced loans and the term of the loan is shorter. Due to this, it’s better to pay off your school loans before you pay of your mortgage.
3. Home Equity Lines of Credit
The interest rates on second mortgages are higher than the mortgages even though they are tax deductible.
4. Credit Card Debt
Paying off your credit card debt is a top priority. Whether you take advantage of 0% transfer offers or not, these introductory rates don’t last beyond 18 months. A lot of debts can carry zero percent, for at least a time. These zero percent deals are usually either temporary or apply to relatively short term loans. So, paying the loans is a top priority.
You Don’t Have A 12-Month Emergency Fund
The best thing is to have money that is enough and kept in taxable accounts. This money will take care of all your expenses for a year before you apply for more money to mortgage.
While you are paying off your debt and working to maximize your retirement accounts, then a 12 month emergency fund is too much. However, when you meet these goals and you decide to pay off your mortgage early, 12 months don’t sound bad.
You should always consider liquidity. You need a lot of cash to pay off the mortgage early. While you may think it is reasonable, you shouldn’t pay off the mortgage in a way that will take all of your cash.
You Aren’t Saving At Least 20% Of Gross Income
You don’t have to divert money to the mortgage until you are saving a significant portion of your income. You should save a minimum of 20% of your gross income. This is important before you apply for more money cash to the mortgage. Part of these savings may include retirement savings to IRA and 401k accounts, and also savings to taxable accounts.
benefits of a paid off house
That was a personal choice and it was best for our family.
Top 15 Benefits of a Paid Off House
If paying off your mortgage sounds interesting to you, here are 15 compelling benefits of a paid off house.
1. Decreased Annual Living Expenses
According to the US Department of Labor, the largest expense in the typical American family’s household budget is their mortgage or rent. Imagine that being completely wiped from your annual expenses. What a weight off your shoulders!
That would leave you more money for fun, vacations, investing for the future, contributing to your kid’s college funds and so much more.
Since our mortgage and extra principal payments were around 35% of our living expenses, we are breathing MUCH easier with our mortgage gone.
2. Makes Saving for Retirement Easier
Before paying off our mortgage our annual expenses were around $75,000 per year. With that type of lifestyle, we would need to save around $1,875,000 to retire comfortably using the 4 percent rule.
By removing our mortgage from the equation, our annual expenses got to around $60,000 per year. In theory, this means we would only need to save up $1,500,000 for retirement to live a comfortable lifestyle.
Now there are a lot of factors that can throw that convenient math problem off (inflation, lifestyle change, etc), but when all is said and done, it’s going to be easier for us to retire. $375,000 easier!
3. Increased Savings Rate
With no house payment, we were able to save around 50% of our income. That was huge for us.
At the beginning of our marriage, we were living for today, spending what we wanted and we were happy … until we realized we had a negative net worth. Yikes!
Having a large cushion of cash, built-up retirement accounts that have allowed us to achieve Coast FIRE and the ability to funnel more of our money toward income-producing assets also makes us feel happy … just in a different way.
4. Increased Net Worth
When you don’t have debt, you avoid the negative drain on your net worth. And without a mortgage, this is doubly true!
When we started our journey of financial betterment in 2010, we had a -$50,000 net worth. (Yes, that’s a negative symbol).
We owed A LOT more than we owned. I owed more on my home than it was worth, had $30,000 of student debt and I was spending more than I was earning. I even bought my wife’s engagement ring with my student loans!
10 years later, our net worth grew to over $1,000,000 through simple investing strategies, increasing our income, and focused debt destruction. Without a mortgage, our net worth continued to soar.
(I track our net worth with a simple spreadsheet, but an awesome tool to automate the process is a free service called Personal Capital).
5. Have More Fun
My wife loves to do design projects in our home. I love vacations. With more available cash flow, we’ve been able to enjoy life and reward ourselves more lately.
Nicole has been able to update our laundry room, update our kitchen, buy new furniture guilt-free and we even got the big screen TV we always wanted. This home now feels like a palace and it’s ours!
We’ve traveled a lot more as well. Disney World, Cabo San Lucas, Los Angeles, Ft. Lauderdale, Cancun and many trips to Northern Michigan have been some of our favorite destinations since paying off our mortgage.
Having the extra cash available has helped us travel without restriction. Getting out of town during our Michigan winters is now a must for this family.
6. Reduced Stress
I don’t know about you, but I got really stressed out about the size of my mortgage. Having such a large payment each month made me feel worried.
“What if I lose my job and we’re not able to make the payments?!
“Or what if I get a new boss and he’s a complete jerk, but I can’t leave because of the mortgage?!”
“What if a recession rolls in and severely impacts our income?”
These were real reoccurring thoughts I had. And I couldn’t just tell myself to calm down or not think about it. (Believe me, I tried. The Calm meditation app has become a good friend of mine lately!)
When our $1,300 (w/o taxes and insurance) payment was gone, my stress level decreased dramatically.
Sure … There are still other bills we have to pay for the rest of our lives, but none will ever be as large as our mortgage.
7. Never Worry About Refinancing Your Mortgage
You know when the interest rates drop and all you hear is chatter about refinancing your mortgage? Well, when you don’t have a mortgage, you don’t even have to wrestle with the decision of if you should refinance your mortgage or not.
That is one less decision you have to make FOR THE REST OF YOUR LIFE!
There are major benefits to reducing the number of decisions you need to make in your day. You’ll be more productive, your mind will feel more clear and life can feel easier.
8. Ownership Pride
The fact that Nicole and I own our home outright fills me with so much pride. The peace of mind that comes with true homeownership is incredible.
I’ve even found myself standing on my front lawn staring at my house and saying, “That’s our house. We own all of it. My kids will always have a place to call home.”
Those statements are REALLY fun to say.
9. Design a New Lifestyle
I’ve had the chance to interview dozens of families on my podcast who have paid off their mortgages. One of the most impressive things I’ve learned about how mortgage freedom has changed things for them is with their overall lifestyle design.
Many have gone from working full-time jobs to just part-time jobs. Now that they don’t need as much money to live, they don’t want to work as much. How cool is that!?!
Others completely changed career paths altogether. It’s as if they now had the confidence and financial cushion to make bolder lifestyle decisions. That’s what mortgage freedom did for them.
Like these folks, I made the choice recently leave my corporate career and work part-time as a podcaster and a full-time Dad. It’s been a wild ride so far, but I’m loving it.
As for my wife, she recently left her 9-to-5 lifestyle to go back to school and to become an esthetician.
Not having a mortgage definitely gave us the confidence to take those major lifestyle leaps. This is definitely MY FAVORITE benefit of all 15 benefits of a paid-off house.
life after mortgage is paid off
Having the weight of that payment lifted gave Fairchild the confidence to take a $100,000-plus buyout offer her employer proposed to staff. “If I’d still had a mortgage, there’s no way I’d have taken that offer,” she admits.
Fairchild is among the 44 per cent of Canadian homeowners age 45 and over who have paid off their mortgage, according to the “2010 TD Canada Trust Boomer Buyers Report.” Since the average mortgage payment in Canada is about $1,500, that’s a big chunk of change these folks are able to pocket every month. Curious about what they do with all that money? So were we. Here are some of the possibilities for using the extra dough once you are mortgage-free.
1. Increase your retirement savings “Lots of people aren’t able to contribute much to their RRSPs when they’re bringing up kids and paying off mortgages, and they feel guilty about that,” says Karin Mizgala, a certified financial planner and CEO of Vancouver-based Money Coaches Canada. “But they can make up for this when the mortgage is done. For example, if you put $1,000 a month into an RRSP from age 50 to 65, you’ll end up with about $260,000, based on a five per cent return.”
2. Put the kids through school Paying off a mortgage can coincide with your kids leaving for university. With the cost of earning a four- year degree while living away from home hovering around $80,000, your kids are going to need all the help they can get. If they haven’t yet hit university age, you can use the extra cash to top up your RESP contributions. While Fairchild was busy paying down her mortgage, she was unable to put aside more than $100 a month in RESP savings for each of her school-age boys. Now she plans to more than double that to $2,500 a year per child, which will allow her to get the maximum Canada Education Savings Grant of 20 per cent on the first $2,500 contributed. “Because my husband and I are older parents, it’s even more important we get as much money as possible locked away now,” she says. “I don’t want to be paying for my kids’ education when I’m fully retired and want to take a trip to the Grand Canyon.”
3. Move one step closer to retirement With no mortgage to worry about, you won’t need as much retirement income. If you are part of a couple, you may find one of you can quit work and you can live on one salary instead of two. When one of Mizgala’s clients pocketed an extra $1,000 a month after paying off her mortgage, she realized she’d be able to retire comfortably in five years at age 63, instead of waiting until 65.
4. Change your work life “Some people hate their job, so now they can think about either retiring sooner, working part-time or starting their own business,” says Mizgala. That’s what Kit Redmond did. Ten years ago, the now 52-year- old TV executive paid off the mortgage on a Toronto home she and her husband had bought in 1994 for $380,000. Around the same time, she decided to take a risk and start her own production company. Today, she and her husband each earn six figures, but they’d managed to pay off a large amount of their mortgage when she was a stay-at-home mom and their household income was less than $100,000 a year. They did it by making annual lump sum payments of $5,000 to $20,000 toward the mortgage principal and by giving up extras such as a second car. Among the shows Redmond produces is Burn My Mortgage on W Network. “It was inspired by my own experience,” she admits. “It’s great to be able to help other families get rid of their mortgage.”
5. Reinvest in your home Undertaking a renovation or an addition once your mortgage is paid off can increase your home’s value and give you more money once you sell it. You can put the reno expense on a line of credit and then pay it off as you would a regular mortgage. Once her home was paid for, Redmond invested $50,000 in a new kitchen that helped the home command a $740,000 selling price. Kelley Keehn, author of The Woman’s Guide to Money and six other financial books, suggests talking to realtors to help determine what types of home improvement will get you the most bang for your buck. “It’s important to consider how long you’ll have to live there before recouping your costs,” says Keehn, also the host of Burn My Mortgage. She cautions homeowners to “be careful about thinking about your home in terms of an investment — an investment is something you will liquidate for your retirement. Plenty of people want to still live in their home when they retire.”
6. Downsize If you no longer want the hassle of a large home, you can sell your property, move to a smaller house, condo or apartment, and sock a lot of money away. According to the TD Canada Trust report, 80 per cent of Canadians age 45 to 64 say their next move will be to a smaller home.
7. Buy a vacation property Once you’ve paid off the mortgage on your principal residence, you may be ready to invest in another property. (Twelve per cent of boomers plan to purchase a vacation property in their retirement, according to the TD Canada Trust report.) In 2009, shortly after Marianne Rogers* paid off the $143,000 mortgage on the Laval, Que., home she purchased in 1998, she put $45,000 on her line of credit to buy a $200,000 condo in Nanaimo, B.C. The rental income covers all but $150 of her monthly costs. “It’s an investment for my retirement,” says Rogers, 51. “At some point I may move out there, or sell it for about $400,000 in about 15 years’ time.”
8. Borrow against your home to invest more aggressively You might be tempted to “unlock” some of the equity in your paid-off home by borrowing against it and investing in mutual funds or stocks. The hope is the investment will cover the cost of the loan and also generate extra income. But as experts caution, this is an option only for savvy, financially secure investors who have a high tolerance for risk. “It can work if you make more money on the investment than you have to pay in interest, but it can also backfire,” explains Mizgala. Keehn agrees: “On paper, this sort of thing can look great — you can get a mortgage for 3.5 per cent and your stock portfolio could earn six or seven per cent. But what if the market drops and suddenly your investment doesn’t cover the payment? You still have to pay that loan and now you’ve put your home at risk.”
9. Give to others Emily Tilson*, 66, a retired Hamilton, Ont., nurse, has been living mortgage-free for seven years. “We bought cheap houses compared to our friends,” she says. “We lived in inner-city neighbourhoods or out on a farm.” Tilson says being mortgage-free has allowed her to be generous with her four children and five grandchildren. She gave one daughter a second-hand car, treated a grandson to Walt Disney World in Florida, pays for her grandkids’ violin and piano lessons, and helps send them to camp. “To me, charity begins at home and with my friends. My pockets have holes and money just leaks out of them, and I’m okay with that,” she says. “It gives me great pleasure to give gifts that are meaningful.”
10. Splurge Sure, you could do the financially responsible thing and top up your RRSP, but along with the happy dance that comes with burning your mortgage, you may want to indulge a little. While Kit Redmond and her family made do with one vehicle during those years of scrimping and saving to pay off the mortgage, she now drives what she calls her “midlife celebration car” — a red Audi convertible. “Yes, I bought it with cash,” she says proudly. “When you don’t have a mortgage, you have a lot of freedom — whether it’s choosing a new career or buying the car of your dreams.”
RRSP or mortgage? Where should your money go? It’s a dilemma many Canadians ponder: What should be the biggest financial priority — saving for retirement or paying off the mortgage?