Tax Downsides to Paying Off a Mortgage

Paying off your mortgage loan early comes with a downside.

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You might be tempted to pay off your mortgage loan as quickly as possible. It's not much fun, after all, making that big mortgage payment each month, especially when much of it is going to interest rather than paying down the principal. But paying off your mortgage loan early might not make financial sense in the short term. Doing so comes with some big tax downsides.

The Tax Benefits of a Mortgage Loan

Making mortgage loan payments comes with large tax benefits for most homeowners. Each year, homeowners can deduct the interest they pay on their mortgage loans. There are limits -- you can deduct the interest on up to $1 million worth of mortgage loans -- but this is lucrative benefit.

The Tax Hit

The National Association of Home Builders gives an example of how much money this deduction can save homeowners: According to the association, a family with a joint income of $80,000 and a mortgage loan of $180,000 with an interest rate of 5.5 percent would save a total of $7,050 on taxes during the first five years of owning a home. If you pay off your mortgage loan early, you'll lose out on these tax benefits.

Mortgage Insurance

Until you build up equity of 20 percent or more in your home, you'll have to pay mortgage insurance. The premiums you pay for this insurance are tax-deductible. If you pay off your mortgage loan early, you will save the cost of the insurance premiums, but you will no longer be able to claim a deduction for the interest on your taxes.

Other Financial Benefits

Mortgage loans generally come with lower interest rates than do credit cards. It makes financial sense, then, to take whatever extra income you have to pay down your debts that come with higher rates. If you are fortunate enough to have little debt besides your mortgage, it might still make more financial sense to sock away money for such expenses as your children's college education or your own retirement than to spend those dollars on paying down your mortgage loan.