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The dream of owning a home might more accurately be described as the dream of paying off a mortgage. It might seem like a no-brainer to get rid of your home loan as quickly as possible, but before you raid your bank account to make payments ahead of schedule, here’s what to consider.
Benefits of having a mortgage
- Credit score boost: Having a mortgage and making regular monthly payments can help improve or maintain your credit score.
- “Good” debt: A mortgage is often considered a “good” — or at least worthwhile — debt to carry.
- Frees up your money for other goals: To pay off your mortgage early, you might need a large sum of cash. If you continue to pay your mortgage at a steady monthly rate, you can put that sum to other, possibly better, uses or goals.
- Tax benefits: As long as you’re still paying your mortgage, you’re eligible for the mortgage interest deduction.
Drawbacks of having a mortgage
- Having debt: Many folks strive to be completely free of debt. A mortgage is a large debt to take on, which can make some borrowers uncomfortable.
- Paying interest: When paying a mortgage, some of your money is going toward the interest. Some might view that as money wasted, as it’s not going toward repaying the mortgage itself.
- Risk of rate change: If you don’t have a fixed-rate mortgage, you risk your loan’s interest rate increasing over time.
Mortgage vs. no mortgage: How to make the right decision
Aside from being an option for those unable to buy a home outright, one major benefit to financing has been the ability to write off mortgage interest.
When you deduct your mortgage interest, your payments don’t decrease month to month, but your income taxes for the year do, lowering your costs overall. (In many cases, your state income taxes would be lower, as well.)
This deduction historically made having a mortgage more attractive for many homeowners. However, with the Tax Cuts and Jobs Act of 2017, the standard deduction increased to the point where it no longer made sense for many taxpayers to itemize their deductions, effectively eliminating the mortgage interest write-off.
In addition, you don’t have to pay interest like you would with a mortgage. To compare, if you were to buy a $320,000 home with a 5.81 percent, 30-year loan, and make a 3 percent down payment, the interest over the life of the loan totals $346,131 — money you’re spending in addition to the purchase price of the home. With a cash purchase, you’d spare yourself that cost.
Cash has drawbacks, however. One problem is that your liquidity is limited — when real estate is owned free and clear of all mortgage debt, it can be difficult to extract cash. You can get financing, of course, but that raises all the issues associated with obtaining a mortgage: approval, cost, possibly mortgage insurance, etc.
Owning a home without a mortgage may not be as “free” as it seems, either. The cash you used to purchase the home is now money that can’t be used for possibly better alternatives, such as investing, starting a business or paying for education.
Ultimately, the decision hinges on whether there’s something better your money could be doing. Can you keep making your monthly payment and put the remaining money in investment vehicles that’ll help it grow? If so, you might want to stick to your repayment schedule. If you value peace of mind more than anything and want to own your home outright, it might be worth making payments ahead of time.