Should You Pay Your Mortgage Early?

I’ve been asked several times this month whether it makes sense to pay extra each month to pay off a mortgage sooner. It’s a good question, and the answer depends on your personal financial situation.

Mortgage acceleration programs can help homeowners pay off their loans faster. Although many financial planners advise against early payoff, some homeowners value the peace of mind that comes with owning their home free and clear more than potential tax benefits or returns from other investments.

Most mortgage acceleration programs use both a primary mortgage and a line of credit. The goal is to reduce interest costs by depositing all income into the credit line, then using that credit line to pay down the mortgage faster while also covering everyday expenses.

These companies use software to track income and spending patterns, evaluate the interest rates on both loans, and recommend how much to pay toward the mortgage each month. They often claim their programs can pay off a 30-year loan in one-half to one-third of the usual time. Program fees typically range from $2,000 to $5,000.

Are these programs worth the cost, or could you accomplish the same result on your own?

If you are disciplined and make one extra payment each year on a 30-year mortgage, you may shorten the loan term by about five years. Making two extra payments each year could reduce the term by about nine years. In other words, you may be able to achieve much of what these programs promise by following a consistent plan – without paying the fees.

The bigger question is whether paying off your mortgage early makes financial sense. Many financial advisors caution against it because it can make your assets less liquid, leaving you unable to access home equity when you need it most. Instead, they often recommend keeping cash in safe, accessible accounts for emergencies.

A mortgage may also provide tax benefits, since the interest portion may be deductible, subject to limitations. This can be especially valuable during high-income earning years, when mortgage interest may be one of the few large deductions still available.

Mortgage rates have risen from the historically low 3% to 4% levels seen a few years ago, but a mortgage can still be one of the less expensive ways to access capital. If you can invest those funds in opportunities that earn more than your mortgage rate, that may be a better use of your money.

Finally, having a mortgage effectively keeps the bank as your partner. If a major disaster, such as an earthquake or fire, destroys your home, you may be able to walk away from the loan because the property is often the sole collateral. I do not advocate this approach, but it is a possible scenario.

The decision to pay off a mortgage early is personal because a home represents security. I recommend consulting a qualified CPA or financial planner to review your situation and decide on the best course of action.

John M. Lee is a top selling broker with the JODI Group, specializing in real estate sales in the Richmond and Sunset Districts. If you have questions about real estate, please call him at 415-465-0505 or email johnlee@isellsf.com.