A home is typically your biggest asset, and a home loan your biggest debt. Should you even try to pay off your mortgage early?
Your financial priorities are different than your neighbor’s or your best friend’s or your parents’.
Take a home mortgage, for example. Plenty of people are happy with paying 15 or 30 years on a mortgage, while others are anxious to get rid of any debt—including their home loan—as soon as possible.
Which is “right”? As with most things related to money, it’s complicated—and more personal—than a single choice.
Here’s what to consider if you’re thinking about when to pay off your mortgage.
Good debt vs. bad debt
Some people think of all debt as “bad,” but that’s not really the case. Good debt and bad debt both exist. A mortgage lands squarely in the “good debt” column.
“How a loan is secured determines whether it’s good or bad,” says Stanley Poorman, a financial professional with Principal®. “A mortgage is secured by an asset—your house—which gives it an advantage. Personal loans and credit cards are not.”
Think of good debt this way: Every payment you make increases your ownership in that asset, in this case your home. But bad debt like credit card payments? That debt is for things you’ve already paid for and are probably using. You’re not going to “own” any more of a pair of jeans, for example.
There’s another key difference between purchasing a home and buying most goods and services. Very often, people can pay cash for things like clothes or electronics. “The vast majority of people couldn’t pay cash for a home,” Poorman says. That makes a mortgage all but necessary to buy a house.
Potential disadvantages of paying off a mortgage
Your mortgage may not be worth paying off early if the factors below apply to you.
| If … | You don’t need to worry about paying off your mortgage because … |
|---|---|
| You have a good interest rate. | You got locked into a great rate before they spiked—say 3%—and you’re not paying a lot in interest. |
| You need to increase your emergency savings. | Paying off a mortgage requires you to deplete cash, or liquidity, which may leave you without a cushion. Focus first on saving for unexpected events. |
| You’re building retirement savings. | There may be better investments. “If you invest the money you would've used to pay off your mortgage into a retirement account, your return over the long term may exceed the savings of paying down your mortgage,” Poorman says. |
| You’re getting a decent tax deduction. | It’s deductible and the mortgage interest may make your effective tax rate even lower. |
| You have other high-interest debt. | Money that “costs” more than your mortgage should get higher priority for early pay off. |
| Your mortgage doesn’t worry you. | You aren’t stressed by mortgage debt and your budget isn’t stretched by the payment. |
Tip: If you’re in the fortunate position to be able to pay off a mortgage faster, and the idea works for your finances, consider moving to an every other week payment schedule, rounding up the total you pay, or making one extra payment per year.
When it may be a good idea to pay off your house
Eliminating mortgage debt could be a good idea if the factors below apply to you.
| If … | You might want to pay off your mortgage early because … |
|---|---|
| You have a high mortgage interest rate. | When you’re paying a high interest rate—think 7% or more—a mortgage payoff may make sense. You could try to refinance when interest rates decrease, but there’s no certainty of when that will happen. |
| You have adequate emergency savings and insurance. | Paying off a mortgage can add another layer of cushion to your protection plans. |
| Your retirement is fully funded. | Those extra savings aren’t needed elsewhere. Use our retirement wellness planner to gauge your progress. |
| Your mortgage interest deduction doesn’t significantly affect your tax return. | When you have a low mortgage balance, you may not be receiving a tax benefit. |
| You have little or no other debt. | Lack of competition in interest rates and debt totals makes it easier to focus on faster mortgage repayment. |
| You dream about being mortgage free. | Debt can be emotional. “What do you want to achieve?” Poorman says. “That’s the question to ask yourself. If a mortgage is a weight on your shoulders, you can prioritize it.” |
| You’re close to retirement. | Eliminating a mortgage can help free up cash flow after you’ve stopped working and may enable you to draw down retirement savings less quickly. Consider four key factors first. |
Ultimately, the decision to keep your mortgage or pay it off is personal and tied to how you feel about money and security.
“You’re working hard,” Poorman says. “It’s about you and what you want.”
What's next?
Aim to balance saving and paying off debt. How are you progressing toward your retirement goals? Log in to principal.com to find out. Don’t have an employer-sponsored retirement account or want to save even more? We can help you set up your retirement savings with an individual retirement account (IRA).
