The Pitfalls Of Trying To Pay Off Your Mortgage Early

Q: Gerald, everyone always says that you should pay off your mortgage early. I remember you saying there was a danger in doing so….why? Esther, Grand Rapids, MI

A: That’s a great question, Esther and yes, the conventional wisdom from many people like Suze Orman for example is that you should try to pay your mortgage off early by making extra principal payments regularly.  Before I present the danger of trying to pay off your mortgage early, I will acknowledge the benefit of lower monthly fixed costs when your mortgage is paid off.

The danger lies in getting stuck or hitting a bump in the road financially before the mortgage is fully paid off.  It’s like trying to swim across a river instead of taking a bridge–you don’t get any credit for getting half way across and if you get stuck in the middle you may drown.

Let me explain, if you run into financial trouble and are unable to make mortgage payments after paying down your principal balance before your mortgage is fully paid off, your lender won’t give you any credit for making regular payments and extra principal payments in the past.  So in this unfortunate scenario of financial hardship, the extra money you paid to reduce your principal and pay off your mortgage early is money you may never see again–your lender is unlikely to give you a break for a few months to catch back up on your payments.

The way to try to insulate and protect yourself from this is to save a nest egg–but if you spend your nest egg to reduce your mortgage balance and then fall on hard times, the bank is not going to give you that money back.   It is for this reason that I think it’s safer if you want to pay off your mortgage early to put money aside earmarked specifically for paying off your mortgage into an interest-bearing account until you have enough to pay off the remaining balance of your entire mortgage, this way you won’t get caught like Homer Simpson trying to cross Springfield Gorge on a skateboard, getting half way across and tumbling to the ground.

I know that what I’m saying is controversial but I’ve seen people with very good intentions get burned. I think it’s laudable to pay off your mortgage early although you never really own property “free and clear” because of property taxes, insurance, utilities and upkeep.  Again,  I’m not saying there are no benefits to paying off a mortgage early-it will reduce your monthly fixed payments, but contrary to the popular saying, you never really own a property “free and clear”-that’s a myth (there’s always property taxes, insurance, utilities, maintenance and capital improvements).  As an example, you often see retired homeowners on fixed incomes who’ve paid off their mortgage early but can’t keep up with their property taxes and insurance.  Just remember, mortgage or no mortgage, owning property always costs you something.

Thanks for your question, Esther.  Good luck.

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