When paying off your mortgage may not make sense
One argument for not paying off your mortgage is that you may be able to do more with that same money by investing it, assuming your expected returns are higher than what you're paying in interest on the loan. For example, if you get a 6% return on an investment and your mortgage is 5%, you're 1% ahead on your money. However, this strategy only works if you actually invest the money and if the investment produces the returns you're hoping for.
You might also wonder if the tax break you get for deducting mortgage interest is a reason not to pay off your mortgage. The answer is: not necessarily. The Tax Cuts and Jobs Act, effective beginning in 2018, reduced the deductibility of some types of mortgage and home equity debt. But one thing that hasn’t changed is this tax break applies only if you itemize deductions. Consult a tax advisor to see what may make sense for you.
Paying off your mortgage may not be in your best interest if:
- You have to withdraw money from tax-advantaged retirement plans such as your 403(b), 401(k) or IRA. This withdrawal would be considered a distribution by the IRS and could push you into a higher tax bracket.
- Withdrawing the funds puts your retirement savings at risk or forces you to make drastic changes in your lifestyle.
Paying off your mortgage early
Paying off your mortgage doesn't have to be an all or nothing decision. You could also pay a little more each month to pay it off early without forking over a big sum all at once. Some lenders offer a bimonthly payment schedule, resulting in one extra payment per year, which gets you to your payoff faster with less interest. If your lender doesn't offer this option or if they charge a fee for it, you can send in the extra payment on your own. If you receive a large check or unexpected windfall, you can apply those extra funds to your mortgage. If interest rates fall at some point in the future, consider refinancing your mortgage and, if possible, shorten the term of your loan.
What about reverse mortgages?
A reverse mortgage, or "home equity conversion mortgage" (HECM), is a type of home equity loan for people 62 and older that converts a portion of home equity into cash. The lender makes payments to the homeowner, who maintains ownership of the home throughout his or her life. However, there are nuances to reverse mortgages, and the terms and conditions should be considered carefully since they affect your beneficiaries. For example, when you die, the bank becomes the owner of your home by foreclosing on it and then selling it to pay off the loan. In addition, because lenders require that you live in the home as your primary residence, you’ll need to repay the loan if you want or need to move.