Should You Pay Off Your Mortgage Early?

Housing debt is the biggest single expense of all American households combined, and is sometimes the only form of debt carried by a single person or family. In general, we are often advised to pay off debt as quickly as possible, no matter what. However, when it comes to your mortgage, this is a difficult feat to accomplish, and it might not even be the most financially sound either.

All debt is not created equal

The reason why the topic of early mortgage payment is even up for debate involves the way most financial advisors and experts classify different types of debt. As Kelly Chen of CNN Money explained, mortgages are generally considered "good debt"  because it is a loan used to buy something that (usually) appreciates in value. Student loans also tend to fall into the category of "good debt" because in most cases borrowers intend to use it to obtain a college degree and thus secure a higher-paying job.

On the other hand, debt from credit cards or auto loans would be considered "bad debt," but here again, the situation is not always cut and dry. Many people need a car to travel to work and take care of other daily tasks, and if they need a loan to cover the cost of purchasing one, it's hard to argue against that. Whether your debt is "good" or "bad" does not matter so much as how you use it and how you take steps to reduce it over time.

The benefits of early mortgage payment

If mortgage debt is good, why work to get rid of it early? Nerdwallet explained a few reasons why making more than the minimum monthly payment   on a home loan might behoove some homeowners, with the primary objectives being:

• Less debt and more cash flow: Not an inherent benefit, but it's still more money in your pocket.
• More room for savings: With lower monthly expenses, it's possible to put more toward retirement or other long-term savings plans.
• Eliminate interest: With housing debt out of the way, any appreciation in your home's market value equates to more money in your pocket when it's time to sell. It also puts you in a better position to take on a HELOC and pay for upgrades.

Why you might reconsider early payment

These benefits all sound great, so where is the downside? The most obvious reason not to pay off your mortgage early is that it might not be financially feasible. The national average monthly mortgage payment in the U.S. is about $1,022 per month , assuming a typical 30-year fixed-rate loan. After adding in living expenses, taxes, insurance and more, the cash flow of most American households would be stretched thin already.

Saving and investing as much as possible is always important, but many financial experts say the mortgage is not usually the most ideal place to park extra cash. As one such expert speaking with Marketwatch put it, " wealth is created by investing , not by paying down debt." Other advisors speaking with Nerdwallet were open to the idea of early mortgage payment, but only if their client was meeting his or her retirement savings goals.

Investing extra money in a self-directed retirement fund will generally lead to higher and more immediate returns than putting the same amount toward a mortgage. If you consistently have money left over at the end of the month and you contribute to a 401(k) or IRA, increase the amount you withhold from each paycheck to pad these accounts as much as possible.

College funds for children are another smart destination for extra savings that could go toward extra mortgage payment. Similar to retirement funds, college saving accounts are tax-advantaged and tend to provide better returns. Beyond that, they are often underfunded at the expense of surprise medical bills and whatever else life throws your way. Take a look at other options available to you for additional savings before committing to early mortgage repayment.

In any case, making an "investment" in your mortgage by putting more toward its monthly payments isn't really the same as investing in retirement, college savings or even a traditional savings account. A home is known as an illiquid asset because it is not easily convertible into cash. Everyone needs to have a small stockpile of cash in a protected savings account to hedge against the many uncertainties of life. Sure, you could take out a loan against your house in an emergency, and benefit more from that arrangement if you had paid off the first mortgage, but this can still take weeks to go through and is far less ideal than simply keeping that cash stowed for a rainy day.