If you find yourself with enough cash that you’re considering zeroing-out your mortgage sooner than planned, first of all, congrats. You might also be wondering if you should try to pay off your mortgage early.
It’s an excellent question.
Before we jump in, we’re assuming that if you feel like you’re ready to pay your mortgage off early, you’ve checked off some financial boxes. For example:
All good? Great, let’s go over some things you may want to consider before you start pitching in more toward those mortgage payments.
This might surprise some folks: You could pay a penalty if you pay off your loan too early. It could be that you pay a percentage of the outstanding balance or a few months’ worth of interest. How much you pay may also depend on just how early you’re trying to pay your mortgage off (you could pay a bigger penalty if you try to pay it off in the first year than you would in the second).
To know if there’s a penalty and what triggers it, dig up your paperwork. It’s possible that the penalty could apply only under certain circumstances, like if you’re trying to pay off your mortgage within the first few years. If a penalty’s in your future, you could compare the amount to the interest you would pay if you held out a little longer and kept making payments as usual. (This calculator could help you see how much interest you could save.)
Some home owners qualify for a tax deduction, but if you pay off your mortgage (early or otherwise) it means losing this potential deduction in the future. You may want to compare the deduction with the amount you may save on interest if you were no longer paying off your mortgage. A tax advisor could help you with the math.
It’s worth noting that your decision to forfeit a future tax deduction by paying off your mortgage early may not just come down to numbers: If you’re nearing retirement, for example, you may feel differently about carrying a mortgage than you would if you’re in the middle of your career.
Before you start making additional mortgage payments, it could be worth exploring if it would change your lifestyle. After all, it’s one thing to know you have some money around that you can dip into as needed. It’s another thing when that money is no longer there, so consider if it would affect your flexibility. Would you have to make tradeoffs you’re not interested in, like drastically cutting down on discretionary spending or flying coach instead of first class? And if you would, do you want to make these kinds of changes?
It could be worth remembering that everyone’s answer may be different. Friends in the same situation could be good with giving up things like a second-home renovation to pay off their primary mortgage a bit early. You might not – and that’s OK. What’s right for your lifestyle and finances is what’s right for you.
Since we’re talking goals, have you considered what else may be on your list, aside from paying off your mortgage? Using some or all of the “extra” money to support a charity instead of paying off your mortgage early could be an opportunity to magnify your impact. If your employer offers a full or partial match for the charitable contributions you make, the money you give could do even more.
Doing good with your money could also include funding a 529 account which you can use to set money aside for certain education expenses, including your own. In fact, this is sort of a gift-within-a-gift because there’s the amount you’ll be depositing (gift one) and it will earn interest tax-free (gift two).
As Daphne Hu, Vice President and Wealth Manager, Goldman Sachs Personal Financial Management notes in this article, just about anyone can contribute to a 529, so you can pitch in to one that’s for your children or someone else’s. She also says that you may not have to pay a gift tax on the money you contribute (ask your advisor about the rules).
Other possible goals to consider could be things like using the money for a family trust or even a great vacation.
Regardless of what’s on your list, consider which goals you value most and then weigh them against the value – monetary and emotional – of paying your mortgage off early. It may also be worth asking if putting your money towards your mortgage could postpone other goals, and if it’s something you’re OK with.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.