MoneyDo: Consider Paying Off Your Mortgage Early


Should you pay off your mortgage early? It’s a question being asked more often today, because tax reform law enacted in late 2017 increased the standard deduction, making it harder to claim mortgage interest as an itemized deduction. Without that tax benefit, paying off your mortgage might make sense.

Even before the tax bill passed, paying off the mortgage was a consideration for those nearing retirement and looking to remove a monthly expense, or those who just wanted the peace of mind of no longer having a mortgage.

This week’s MoneyDo: ask yourself a few key questions before you go ahead and write that payoff check.

Where are the funds coming from?

Use caution if you’re planning on using money from a retirement account. The good you were trying to do – reduce your debt – could be offset by some strong negatives:

  • The money you withdrew is no longer growing for your future.
  • Tax consequences could minimize the benefits of paying off your mortgage. Withdrawing money from traditional retirement accounts could result in a tax burden of as much as half of the withdrawn amount.
  • Because of tax consequences of withdrawing money from your retirement account, your withdrawal amount now must cover taxes and the cost of paying off the mortgage.
  • If you take money from your retirement account, you’re paying taxes sooner than you would have, which could have an impact on your retirement plans. Most retirement accounts are tax-deferred.

If you have a large cash balance position, take a long look at the opportunity cost of paying down your mortgage. What would you have done with that cash otherwise? Be careful to weigh outcomes – including emotions, like the peace of mind you’d experience by retiring that debt, and your personal balance sheet, which leads us to our second consideration…

What rate are you paying?

The interest rate you’re paying on your borrowed money is an important factor to take into account as you consider the opportunity cost of a mortgage payoff. What long term rate of return could you get by investing, instead of eliminating your mortgage? Consider what rate of return makes your decision a wise one.

Will you incur a prepayment penalty?

While most mortgages don’t have a prepayment penalty, it’s worth investigating if there are prepayment terms in your mortgage before you make a decision. Some prepayment penalty fees could be as much as 80% of six months interest, but prepayment penalties and rules vary. Make sure you take a look.

Paying off a large debt like a mortgage is an important decision. Make sure you have all the facts and are receiving counsel from a financial advisor you can trust before you act.