Is There Any Incentive to Pay a Mortgage Earlier?

Home, sweet home, whether mortgaged or paid off.
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If you've qualified for a mortgage and bought a house, now you can deduct your mortgage interest from your personal income taxes for the life of the loan -- maybe the next 30 years. Great! But with all the tax benefits offered by a mortgage, is there any incentive to pay it off earlier? You bet! No matter how you look at it, a mortgage is a debt. If you want to cut down debt, prepaying a mortgage helps.

Interest Rates

Whether paying down the mortgage benefits you depends on the interest rate. If you have scored a low rate for your mortgage, you're probably better off investing extra cash in mutual funds or stocks and bonds, or paying off high interest rate credit cards. You'll get a better return on your investment. If you have an adjustable rate mortgage and interest rates rise, paying down the mortgage makes more sense. You'll not only get more bang for the buck, but the next time the rate adjusts on the mortgage there's less principal to consider.

Retirement and Other Incentives

Of course, money isn't everything. Retirement might be decades away, but the time arrives before you know it. If you want to retire early, not having a mortgage obligation might make that option more of a reality. If you want to stay in your house, having a mortgage that is largely paid-off also allows you to pursue a reverse mortgage -- a way of turning your house into an income stream while you stay in it. If you have kids and want to help put them through college, the money that previously went to your mortgage can go toward tuition payments.

The Psychological Effect

While it can't be quantified like tax deductions or other objective properties, it's a good feeling to own your home free and clear. Rather than wait 30 years, if that's the length of your loan, paying extra small amounts each month can retire your mortgage much faster. Just make it clear to the lender that these extra payments go to paying down the principal, and check your statements to ensure the money is properly applied. Previous generations held mortgage-burning parties when the loan was paid off. That's not a bad custom to revive.

Read the Fine Print

Most types of mortgages allow prepayment without penalty. However, always read the fine print to make sure that yours is one of them. Better yet, ask your lender after qualifying for the mortgage whether there are prepayment penalties and get the answer in writing.

A Little Goes A Long Way

If you want to pay extra amounts on your mortgage, you don't have to do it every month. You can do it when have some extra money. You can also make one extra mortgage payment per year. As the years go by and your debt shrinks, you'll be paying less in interest and more in principal with each monthly payment, so the tax deduction will matter less.

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