What Are the Consequences of Paying Off a Mortgage Early?

Paying off a mortgage can save money.

There are several pros and cons of paying off a mortgage early. While it seems like a good idea regardless, there are a few factors that a mortgage borrower should consider in order to make a sound financial decision. Consider each factor and then make the best educated financial decision for your family.

Pro: Reduced Interest Expense and Term

With a 30-year fixed-rate mortgage, a borrower can reduce the term of the mortgage by a full seven years by simply making one extra payment per year over the life of the mortgage. This can add up to thousands of dollars in interest over the life of the debt. Additionally, it increases the borrower's equity in the property faster. This increase in equity allows a borrower to net a higher percentage of the sales price in the event of the sale of the home.

Con: Pre-Payment Penalty

In some cases, a lender will charge a borrower a fee for paying the mortgage off early, known as a pre-payment penalty. This is to recoup the lost earnings from the repayment of the mortgage. This fee can be small or large, depending upon the initial terms of the mortgage debt. Additionally, if a borrower elects to pay his mortgage bi-weekly, as opposed to monthly, to reduce the debt faster, he can be charged per bi-weekly payment a small fee, which can range from $2 to $10 per transaction.

Con: Loss of Tax Deduction

Mortgage owners have the option of deducting the interest paid on their mortgage from their taxes. However, if the mortgage is paid in full, the deduction is gone and the taxes due rise. Additionally, if the borrower pays off his mortgage debt early, he loses the option to use that money for other purposes, such as investments. If the investment interest rate is higher than the mortgage interest rate, the borrower has lost potential investment income.

References

• Kiplinger: Early Mortgage Payments Can Pay Off
• Financial Web: All About Prepayment