When You Should (and Shouldn’t) Pay Off Your Mortgage Early

These are the top reasons as to why you should and should not consider paying your mortgage off early.

Not having a mortgage (especially going into retirement) is an incredibly attractive thought but is it worth anything in order to get there?

Definitely not. 

There are certainly times when it pays big time to get rid of the mortgage but certainly not in all cases. 

Here are some things to consider. 

Reasons To Pay Off Your Mortgage Early

Let’s start with the big reasons to get your mortgage paid off as soon as possible. 

1. To Lower Monthly Expenses

For a lot of people, a mortgage is often their biggest monthly expense and knocking it out would mean freeing up a large chunk of cash flow for other things. 

This can be especially helpful as you transition into retirement as it would mean that you’d need less monthly income to maintain the same standard of living as you had while working. 

2. To Save on Interest

One of the obvious benefits of paying your mortgage off early is that you don’t have to pay as much in interest. 

This is especially true if you got your mortgage years ago when interest rates might have been higher than today’s rates.  

One concern that people have when paying their mortgage off early is that they will no longer be able to use their mortgage interest as a tax deduction. And while this can be a point to consider, now that the standard deduction is much higher, this concern is no longer relevant for many people because they don’t have enough deductible expenses to itemize anyways. 

Not to mention that as you approach the end of your mortgage the amount of interest that you pay on each payment gets increasingly closer to 0. 

3. It Will Make You Happier!

Yeah seriously. Studies have shown that as people get closer to having their mortgage paid off, the happier they become. 

Not to mention it can feel incredibly liberating to be completely free of debt (assuming you have no other debts). This can make retirement a much less stressful time as well.  

Reasons To NOT Pay Off Your Mortgage Early

1. If Your Cash Reserves Are Low

While not having a mortgage is great, you probably don’t want to do it at the expense of your cash reserves. This is what they call house rich and cash poor. 

What this means is that all your money is tied up in your house leaving you without much cash reserves for the unexpected. 

And while you certainly don’t want to go overboard with safeguarding a bunch of cash either, you want to make sure you are striking a nice balance between the two.

2. You Have High Interest Debt

Saving on mortgage interest is nice but certainly not worth it if you are also paying interest on high interest debt. This could be credit cards, personal loans, or high interest car loans. 

You will want to knock out all your high interest debt as soon as you possibly can and then worry about paying your mortgage off after that. 

3. You Need To Catch Up For Retirement

In my opinion, everyone should try to be mortgage-free by retirement. However, you don’t want to take this too far by sacrificing your retirement savings. 

If you aren’t on track to have enough retirement savings come retirement then you may want to prioritize your efforts on putting more money away in your TSP, IRA, 401k, etc. 

After all, it is possible to still retire with a mortgage but it is quite difficult to retire comfortably with limited retirement savings even if you don’t have a mortgage. 

4. You Need to Spread Your Money To Other Baskets

Somewhat related to my last point, you don’t want to overinvest into your house if your other investments are lacking. Because, as we know, an important principle in investing is diversification. 

In other words, if too much of your net worth is tied up in your house then you may be extra vulnerable to a downturn in home prices. 

5. You Only Have Retirement Accounts

One common question I get all the time is if it is worth dipping into your retirement accounts (TSP, IRA, 401k, etc.) in order to pay off a mortgage. 

For example, someone is retiring with 500k in retirement accounts and 80k left on their mortgage. 

In order to get rid of the mortgage by retirement it can be very tempting to just pull out 80k from the retirement savings to get rid of the mortgage in one fell swoop. 

However, by doing this they will often have to pay a hefty price in taxes for taking a large lump sum out of their retirement accounts all at once. 

In these types of situations it can still make sense to pay the mortgage off early but to spread it out over many tax years. This way you even out the tax bite while also letting your retirement savings grow a little longer. 

About the Author

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at Haws Federal Advisors.