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4 Reasons Not to Pay Off Your Mortgage Early

Tempting as it may be to pay off your mortgage early, it’s not always the smartest move.

[Updated: Feb 04, 2021] Oct 27, 2019 by Maurie Backman
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Most people can’t buy a home without getting a mortgage, but after a while, those monthly payments can start to become a drag. If you’re tired of forking over a chunk of cash to your mortgage company every month, you may be tempted to try to pay off your mortgage early. But if these scenarios apply to you, that may not be the best idea.

1. You have a low interest rate on your mortgage

If your credit was excellent at the time you applied for your mortgage, you probably snagged a great interest rate on that home loan. This holds especially true if you took out your mortgage at a time when rates were more competitive as a whole. But if that’s the case, paying off your mortgage early may not make sense. That’s because if you invest that money instead, you can earn more than the amount you’d save with an early mortgage payoff.

Imagine your mortgage rate is around 4%. The stock market has averaged more than double that amount historically, so if you have spare cash, you may be better off putting it there than paying it into your mortgage.

Furthermore, you can take the money you’d use to pay off your mortgage early, and instead invest in real estate -- whether that’s in the form of a rental property, or buying REITs.

2. You have other high-interest debt

If you’re going to pay any debt off ahead of schedule, it makes more sense to target the debt with the highest interest rate. And although your mortgage might constitute the single largest individual chunk of debt you have, if you’re carrying other debt, you’re probably paying more interest on it. For example, if you snagged a competitive mortgage rate, but have credit card debt, there’s a chance you’re paying double or triple the interest rate on the latter.

Furthermore, while mortgage debt is considered the healthy kind to have, credit card debt is considered unhealthy, and too much of it can damage your credit score. For this reason, credit card debt in particular should take priority over extra mortgage payments.

3. You don't have emergency savings

You need to have money on hand for unplanned bills. Without it, you risk racking up credit card debt, or other costly debt, when unanticipated expenses land in your lap. If you’re without an emergency fund, it’s more important that you put any extra money you come across into the bank, rather than using it to pay down your mortgage. Only once you have a solid three months’ worth of living expenses socked away should you begin to contemplate other financial goals.

4. Your retirement savings could use a boost

You’ll need a healthy nest egg to pay for your living expenses once you retire, so if yours isn’t looking all that robust, you’re better off boosting your retirement savings than paying down your mortgage. The reason? You can finance a home affordably, but you can't finance your retirement the same way. If you don’t have adequate savings to pay the bills when you're older and no longer working, your sole option may be credit card debt, and that’s a costly, dangerous type to accrue later in life.

Of course, in some cases, paying off a mortgage early does make sense. If you're stuck with a high interest rate and you can't refinance affordably, then paying off your mortgage early could save you thousands of dollars in interest over the course of the loan. But, if your rate is competitive, then in many cases you’ll be better off putting your extra money elsewhere.

If you are going to pay off your mortgage early, keep in mind that some lenders impose a prepayment penalty for doing so. Review the terms of your mortgage thoroughly to avoid getting hit with an unwanted and unexpected fee.

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