The best answer is: It depends. While most people look forward to paying off their home, some circumstances may exist that could keep it from being a great plan. For most people, a paid off mortgage is a day of celebration and relief. Whether you should pay off your mortgage depends on how your situation lines up with some common sense guidelines.
Is there a penalty for an early pay off?
This will not mean that you should not pay off your mortgage. You need to weigh in the penalty when you are considering the benefits. If the penalty is a relatively small amount of the remaining balance, this should not be a big factor in the decision. However, if it is 5% or 10% of the initial balance, you may need to chew on it for a while. Read your mortgage terms closely and consult with your lender to make sure that you have it right.
How rapidly is your house appreciating?
For those whose property is appreciating at a nice rate but do not plan to move anytime soon, paying off the house may be a great idea. There is a good chance that you will make more money by investing in your home than by investing in stocks. Plus, you will not have to pay interest on the mortgage. This means that your estate can benefit from the entire amount of appreciation that your house is receiving.
Are you planning to sell it soon?
If you live in a fast growing area with rising property values, you may choose to not pay off your mortgage. You could discover that you want to relocate to a cheaper area. In this case, you may want to leave the money in the bank drawing interest until you sell. Paying off the house can make buyers believe that you can accept less. If you have a mortgage to retire, they will know that you do not have as much wiggle room on the price.
Where is the money coming from to pay off the mortgage?
This can be a big one. If you are cashing out retirement funds to pay off the mortgage, it is probably a terrible idea. On the other hand, if you have surplus money earning one or two percent a year in a savings account, you will find it far more profitable to put that money into retiring your mortgage. With reasonable credit, you can always get a new loan on the house if you need it before you can build the account back up. If someone hands you a stack of money to pay off your home, run to the bank and get it done.
How far are you away from the end of your mortgage terms?
A negative thing about large loans is that near the end of their term, the money is almost interest free. Unless you just want to experience paying off the mortgage early, there is little value in throwing $10,000 on the table in order to pay off one year of a mortgage with a decent interest rate. You may save $100 or so in interest. Why bother when your savings will probably pay you that amount or more on the money if you leave it in the bank.
Do you have a reason to need to spend down cash?
If you are in a position where you need to spend down your capital, paying off a mortgage is a good option. When senior couples have to divide their assets before qualifying for Medicaid benefits, a paid off mortgage is an acceptable way in most states to spend the money.
This will leave the healthier spouse with a place to live without a house payment.
It also accelerates the amount of time needed to qualify the other spouse for these health care benefits. The same principle applies for a single person. Medicaid allows you to keep your house and return to live in it without penalty should your health improve.
A paid off mortgage will assure you of a place to live.
The simple truth is that a paid off mortgage means that you have no danger of having your home repossessed if you have some type of financial disaster. You will not be evicted for not paying your rent. It can give you a more secure feeling. As long as your real estate taxes are paid, you will always have a place to call home.
Owning a house without a mortgage will boost your net worth.
A mortgage against a house always has to be subtracted from the value of the house when you are computing your net worth. This amount can reduce a very expensive house to a negative on your personal balance sheet. The full value of a house that is paid for falls to your bottom line to push your net worth upward.
Having no mortgage may make it easier to sell your home.
Although a house with no mortgage can be a negative in price negotiations, it can be a plus in the selling time line. The same price flexibility that can work against you can work for you. If you have owned your home for a couple of decades, it is probably worth far more than you paid for it. This means that you could sell it slightly below market value and still make a bundle. Depending on what you plan to do after you sell this property with the money, this might be a viable option for you.
