The pros and cons of paying off a mortgage early

The benefits of paying off a mortgage early should be weighed against a number of different financial factors.

Couple on steps discussing paying off mortgage

If you had to make a guess about the number of homeowners who are paying off a mortgage early, what number would you pick? Ten percent? Twenty percent?

Turns out that over one-third — 37 percent — of American homeowners no longer have to make a mortgage payment every month.

For those that still have a mortgage, there may be a number of contributing factors or, to them, disadvantages of paying off a mortgage. They may not have the resources to accelerate their payments. They may have other budgeting items they're prioritizing. Or they simply may not want to focus on paying off a mortgage early.

However, for anyone who has asked, "Should you pay off a mortgage early," and trim down the duration of a home loan, there's a lot to consider; it's more than just eliminating a bill. Here are some questions to ask and both disadvantages and benefits of paying off a mortgage early.

Q: Are there any hard and fast money or budgeting guidelines to help people decide if they want to focus on paying off a mortgage early?

A: Many financial recommendations point to a simple rule of thumb: If there is a high degree of probability that the dollars you could put toward a mortgage could earn more elsewhere, don't focus on paying off a mortgage. For example, if your mortgage rate is 3 percent and you have a credit card balance at 17 percent, pay off the credit card first. If you have access to savings that have a better rate of return over a number of years, put the money there instead.

Q: When it comes to interest rates and deductions, what factors are important when considering paying off a mortgage early?

A: Meet with your tax advisor to review numbers. What type of deduction does the interest on your mortgage gain you on your taxes? If the deduction is greater than your interest, you may be better off stashing the extra cash in an emergency fund. However, if the interest paid is greater than the deduction and you have access to money to pay it off, it may make more sense to focus on paying off a mortgage early.

Q: How do you balance paying off a mortgage early with other savings goals?

A: If you put extra resources toward a home loan, you'll no longer have access to that cash flow and that's one of the disadvantages of paying off a mortgage. That means it's important to establish an emergency fund first — generally three to six months of living expenses — for unexpected financial needs. And even if you do focus on paying off your mortgage early, don't forget to allocate funds for taxes and insurance in your budget in the future.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.
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