Asking if it's smart to pay off your mortgage is one of those questions that might be answered differently at various points in your life. It will depend on a number of factors, including how old you are, whether you are working or retired, how much you have in savings, and what other investment opportunities you have or might have. Weigh the advantages and disadvantages relative to your situation before making a decision.
One thing is for sure: Paying off your mortgage will save you money in the form of interest. On an average 30-year fixed-rate mortgage, you will end up paying almost as much in interest as you will in principal over the course of the loan. The earlier you pay off your mortgage, the more you save on interest payments. On a $200,000 loan at 5.5 percent, if you make just one extra mortgage payment a year, you will shorten your loan term by five years and save about $40,000 in interest charges. Use an online mortgage calculator with both amortization and extra payment features to see how much you can save under various scenarios.
Opportunity and Emergency Costs
If you pay off your mortgage, your monthly living expenses will drop. Maybe you'll be able to put extra savings away every month. If you are retired, you will be able to stretch your retirement savings further. But if you used your only large chunk of savings to pay off the mortgage, you will be unable to take advantage of any investment opportunities that come along or, worse, you may be unable to weather a costly emergency.
Dos and Don'ts
Follow some obvious guidelines in your considerations. First, if you have other debt at a higher interest rate, pay that off before a mortgage. Second, don't exhaust your savings to pay off the mortgage; emergencies happen and you may need the cash. Finally, if you have plenty of savings -- much more than the mortgage balance -- and the interest rate on your loan or currently available is higher than rates on risk-free investments such as CDs, and you are near retirement age, paying off the mortgage is probably a no-brainer.
Consider Alternatives and Backups
If you feel comfortable paying half the mortgage off, consider doing that and refinancing into a smaller loan. If you do decide to pay off your mortgage, look into opening a home equity line of credit at the same time. You won't necessarily ever have to take any money out, but if you need the money, it will be available. As a final fallback, know you will qualify for a reverse mortgage at age 62 if you have paid off your mortgage. The only qualification is your age.
Mary Gallagher runs Mary Gallagher Planning (mgaplanning.com), an urban planning and consulting business in San Francisco. She is the former assistant planning director for San Francisco and planning director for San Mateo. Gallagher has been writing about real estate, development and land use for numerous websites since 1995. She holds a master's degree in historic preservation planning from Cornell University.