For most Americans, a home mortgage is the biggest financial obligation they will ever have. A traditional mortgage spans 30 years and is often in the hundreds of thousands of dollars, so the interest charges can be enormous.
See: I’m a Real Estate Agent: 5 Cities Where Homes Will Be the Best Bargains in 2024
Learn: 6 Genius Things All Wealthy People Do With Their Money
Even with low-rate mortgages, the bulk of monthly payments go toward interest, not principal, sometimes for 10 or more years. Thus, it’s not uncommon for Americans to want to pay that debt down as fast as possible. In fact, according to Census Bureau data, nearly 40% of Americans already have.
But are you really better off paying off your home mortgage, or are there strategies you can employ to put yourself ahead even more? Read on to learn more.
Average Home Mortgage Interest
Although rates have been falling slightly in 2024, the average 30-year mortgage interest rate is still about 6.9%. While that may seem like a lot less than the 20%-plus charged by credit cards — and it certainly is — it still amounts to a huge amount of interest. In fact, due to the way that home mortgages work, you might be surprised at just how much interest you’re paying in the early years of your mortgage.
Here’s a real-world example, using a $350,000 loan at a 7% interest rate over 30 years. According to amortization tables, your first payment will consist of $286.33 in principal and a whopping $2,041.67 in interest. Even a full 10 years later, the breakdown will be $575.43 in principal and $1,752.57 in interest. Over the course of the full 30-year loan, you’ll pay $488,762 in interest, in addition to the $350,000 you’ll pay in principal.
Be Aware: Housing Market 2024: Avoid Buying a Home in These 4 California Cities
Benefits of Paying Off Your House
The biggest benefit of paying off your house is that you no longer have a monthly mortgage payment. According to data from the U.S. Census Bureau, Freddie Mac, the National Association of Realtors and the Department of Housing and Urban Development, Business Insider estimates that the average 30-year mortgage payment is $2,883. That’s $34,596 per year that you can keep in your pocket, which can be a major motivation.
Another advantage is that you can potentially save tens of thousands of dollars of interest — or even hundreds of thousands, depending on how aggressive your payoff plan is. In the above example, if you socked away an additional $500 per month, you’d shave 12 years off the life of your mortgage and save over $200,000 in interest.
The last primary benefit of paying off your house is psychological. Many Americans simply feel more financially secure knowing that they own their home outright.
Cons of Paying Off Your House
The biggest negative about paying off your home mortgage, most likely, is that you’ll have to make sacrifices to do so. With the average mortgage payment rapidly approaching $3,000 per month, that doesn’t leave a lot of extra cash in the average American’s monthly budget to make even larger payments. This can leave you in an illiquid position should you need cash for some other purpose.
Another drawback is that you’ll lose the tax advantages that come with paying a home mortgage. Specifically, you won’t be able to deduct the home mortgage interest that you are paying.
Lastly — but perhaps most importantly of all — you may be able to earn a greater return somewhere else than by throwing cash toward your mortgage. For example, the long-term return of the stock market has been about 10% annually across its entire history. Even with a 7% mortgage, you could theoretically do better in the long run by investing your excess cash in the market instead of paying down your mortgage.
For those with mortgages 4% or less — which are held by a whopping 62% of Americans, according to Redfin — the case is even greater.
Financial Strategies You Can Employ
Some advisors recommend that you pay as much as you can early on in your mortgage so that you can shorten up the time that you pay interest. In later years, when your payments are mostly principal, it can make sense to shift the bulk of your free cash flow to investments while still paying the minimum due every month on your mortgage.
Another strategy is to compare all your debts and allocate the biggest payments to those with the highest interest rate. If you’ve got a 7% mortgage but also a number of credit cards charging you 20% or more, it makes mathematical sense to devote the most money to knocking down that debt. But if your mortgage is 8% and your only other debt is a student or personal loan at 5%, it makes more sense to pay down your mortgage debt more aggressively.
The Bottom Line
Mathematically speaking, there are times when it might be better for your long-term finances to pay off your mortgage — and times when it won’t be. There are more variables that go into the decision, though.
The emotional satisfaction of owning your home free and clear and the financial stability that it offers, for example, may outweigh the pure dollars and cents of the equation for you, and that’s a personal decision to make. Understanding the pros and cons of the issue are important if you’re to make the right choice.
More From GOBankingRates
- I'm a Shopping Expert: 9 Items I'd Never Put in My Grocery Cart
- You Can Get These 3 Debts Canceled Forever
- 8 Signs You'll Retire Wealthy
- 4 Reasons You Should Be Getting Your Paycheck Early, According to An Expert
This article originally appeared on GOBankingRates.com: 40% of Americans Pay Off Their House — Are They Doing Better Financially?
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
