You’ve may have read that you should prepay your mortgage early to save on your total interest payments. But if you have refinanced or purchased a home recently, you may be one of the millions of homeowners whose mortgage is at historic or near-historic low interest rates. Odds are possible that rates won’t be this low again for a long time, and many homeowners are wondering if the old advice about paying off a mortgage early still rings true.
While the answer depends on your specific circumstances, here are three scenarios when paying off your mortgage early may not be in your best interest:
1. You could do better investing elsewhere.
Assume you want to pay off your 30-year, $200,000 mortgage early, so you prepay an additional $300 per month. This will shorten your loan term by nearly 11 years and save you almost $50,000 over the life of the loan. But could you have done much better than that if you had invested that $300 a month—or $36,000—over a 10-year period?
Economists call this the “opportunity cost” of a choice that you make, and it’s important to weigh it before making your final decision.
2. You could lose some of the value of your mortgage interest deduction.
Most states and the IRS allow you to deduct the annual cost of the mortgage interest you pay. Mortgage payments are structured so that you pay most of the interest in the first years—and realize the most benefits—but you still pay some interest at the end. When you prepay your mortgage, you accelerate your interest payments and compress more interest into fewer years. The mortgage interest deduction’s value will decline gradually over time, but the more interest you pay off, the faster it will decline. Ask yourself if you want to throw away a 30-year long tax break.
3. You’re going to move.
The average American family doesn’t have the luxury of paying down a mortgage for 30 years. According to the 2014 Profile of Home Buyers and Sellers published by the National Association of Realtors, the typical seller lives in their home for 10 years. This is up from six years in 2007. . Therefore, they typically sell one home and buy another, using the proceeds of the sale to pay off their existing mortgage on the old one and make a down payment on the new one.
If you have been making accelerated payments for the 10 years that you live in your home, you will still owe most of the principal and considerable interest if you choose to move at that point. You may find that the appreciated value of the home is more valuable than the amount of interest you saved by making accelerated payments on your mortgage.
If moving or refinancing is a probability within the first 10 years that you will live in a house, another option is an adjustable rate mortgage with a low teaser rate that won’t reset until you plan to move. On the other hand, if you have found the house of your dreams and plan to stay forever, even small prepayments on your fixed-rate mortgage may help reduce the amount of interest you pay over the life of your loan.
Paying off a mortgage early has its pros and cons. In the end, the best strategy for you depends on your personal financial condition, your lifestyle, and how you manage your money.
Steve Cook is editor of Real Estate Economy Watch and covers real estate and mortgage finance for leading news sites. He is a member of the board of the National Association of Real Estate Editors and was twice named one of the 100 most influential people in real estate. Cook was vice president for public affairs for the National Association of Realtors.