Pros and Cons of Paying Off a Mortgage Early

[Urvashi Vasishtha]

My two cents on the pros and cons are:

Advantages:

Probably the primary benefit of prepaying a mortgage is personal peace of mind. In addition, borrowers pay less total interest overall when paying off their mortgage early. For example, if an individual borrows $250,000 with a 30-year, fixed-rate 3.5% mortgage, the total interest accumulated over the life of the loan would be about $154,000. Prepayment of this mortgage after ten years would reduce the total interest payout by at least 50%.

Without the burden of a mortgage, the improved cash flow can be a motivating factor to pay early.

Disadvantages:

Paying off a mortgage balance can drain a savings or investment account and require starting over to rebuild them.

Financial advisors explain that lost opportunity costs represent the potential benefits an individual can miss by paying off a mortgage early. The expense of paying off a mortgage early would mean the loss of earned investment gains if the funds remained in an investment account.

With the average interest gains over a decade being about 10% per annum, paying off a 3.5% mortgage would seem like the wrong choice. Prepaying a mortgage may hamper diversifying wealth across various investment types, leaving homeowners vulnerable to drops in real estate values.

It is important to remember that homes are not liquid assets. Therefore, should an emergency arise, homeowners can be at risk if they apply too much wealth to pay off a mortgage.

Finally, mortgage interest is tax-deductible for those who itemize their income taxes. One way to look at this is that low-interest rates become even lower when tax deductions are considered.

I would love to know your thoughts on the subject. Please comment.