What are the tax consequences of paying off your mortgage early?
Purchasing a home is one of the largest financial investments most people make in their lives, and most spend between 15 and 30 years paying down their mortgage. Some even carry their mortgages through their retirement, making it more challenging for them to maintain the lifestyle and standard of living they had initially expected. For some people, however, the option to pay off their home loan before the term is up is a viable possibility, and they may be mulling over whether this choice is the right one for them.
Paying off a mortgage balance early can seem like the smartest option up front. Doing so may free up thousands each month, which can be used to invest in the market, bolster a retirement savings fund or pay off other liabilities. Before making this decision, however, homeowners should consult a tax preparer to better understand the ramifications of their choice. For instance, the most immediate consequence is that individuals will no longer be able to claim the mortgage interest deduction. Therefore, it's important to do a cost-benefit analysis with a tax professional to determine if the reduced liability a homeowner receives through the write-off outweighs the cost of continuing to pay a balance each month. Several factors will come into play when analyzing these numbers, including the size of the mortgage, interest and property taxes, and how far along the individual is in paying off the balance.
How do owners plan to eliminate their remaining mortgage?
It's also important for people to consider how they will pay off their home loan before making this decision. For instance, some employees who are nearing retirement may consider using a portion of their 401(k) to pay their balance or contributing less to their nest eggs to devote more to their payments. Again, however, these decisions are largely contingent upon a person's individual financial situation, which is why working with a professional is important.
For example, those who have considerable savings, sound investments and retirement funds that provide them with ample resources to maintain their standard of living through their golden years may be in a position to use some of their funds to pay off their balance. Conversely, those who are saddled with debt, have limited retirement funds or have a large balance to pay down might consider other options. This is especially true if they will get hit with a sizable early withdrawal penalty for tapping into retirement funds before they should.
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