Well, your dreams might be misplaced.
Paying off that loan early—if you have the extra dollars—seems to make sense, especially if you have other plans for your money. Yes, you absolutely should make your mortgage payments on time each month with the goal of one day eliminating these payments entirely. But paying off your mortgage loan early? That might not make the most financial sense, even if you have the funds available to pay off your 30-year or 15-year mortgage loan before it reaches the natural end of its life.
Here are three reasons why paying off your home loan months or years early might not be the right move for you.
You have high credit-card debt: Mortgage debt has a key advantage over other forms of debt: low interest rates. The same can’t be said of credit-card debt, which can come with sky-high interest rates. It’s not unusual for consumers to have credit-card debt that comes with interest rates of 15-20% or higher. If you are burdened with high levels of credit-card debt, it makes more financial sense to pay off your credit cards before you use your extra money to pay off your mortgage loan early. Take any extra dollars to pay down the debt that comes with the highest interest rates.
You need that tax deduction: Having a mortgage loan comes in handy at tax time, when you can deduct the interest that you paid on your mortgage throughout the previous year. The IRS allows you to deduct the interest paid on up to $1 million worth of mortgage debt, and you can take this deduction for both a primary residence and a second home. You can also deduct the interest on up to $100,000 worth of home-equity loans. This holds true even if you didn’t use your home-equity loan to make any home improvements. If you pay off your mortgage loan early, this tax advantage will disappear. This can be a painful out-of-pocket experience, especially if you work as an independent contractor or on a freelance basis. That mortgage-interest tax deduction can help soften the blow come income-tax time.
You need to save for retirement: If you’re not contributing the maximum to your retirement plans, it makes sense to take the money you might use to pay off your mortgage loan early and instead boost your retirement savings. People are living longer today. They need, then, to save more money to ensure a retirement that isn’t ruined by financial stress. Unfortunately, financial surveys show that a majority of people approaching retirement have not saved enough for their after-work years. You can avoid this trap. Consider paying off your mortgage loan early only if you are already contributing the maximum amount of dollars to your IRA or 401(k) plan.