One of our current financial priorities is saving for a down payment on our next house. That goal has prompted a closer look at exactly how much we should save.
With our first home purchase we didn’t put 20% down and ended up paying private mortgage insurance (PMI)—a lesson we won’t repeat. For our next house we plan to put down at least 20% to avoid PMI.
Because we are self-employed, we’ve also heard that lenders often expect a larger down payment from business owners—often 25% to 30% and sometimes 35%—so that’s influencing our target as well.
Those percentages translate into a significant sum of money, which raises an important question: at what point should we stop prioritizing our down payment and focus more on retirement savings instead? We are already contributing to retirement, but should we increase that rate?
In personal finance circles opinions vary. Some people prioritize paying off a mortgage quickly, while others prefer investing or saving in other ways. There’s no one-size-fits-all answer, which makes choice harder.
Below are the main advantages and disadvantages of paying off a mortgage early or even buying a house outright with cash, presented so you can weigh which approach fits your situation best.
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Positive – Your house will be paid off sooner
The most obvious benefit of accelerating mortgage payments or buying a home in cash is that you’ll own the property free and clear sooner. Eliminating the monthly mortgage payment frees up cash flow and reduces ongoing housing costs.
Removing that large monthly obligation can ease stress, boost your sense of financial security, and increase independence. Fewer fixed expenses can also make it easier to manage unexpected costs or make different lifestyle choices in the future.
Negative – Your money might earn more elsewhere
Although paying off a mortgage early feels rewarding, mortgage interest rates are often relatively low. In many cases you could receive a higher financial return by investing those extra dollars in other vehicles—particularly investments with expected returns above your mortgage rate.
That could include contributing more to retirement accounts, investing in diversified stock or bond portfolios, paying off higher-interest debts, or building passive income streams. The decision depends on the comparison between your mortgage rate and the potential after-tax, risk-adjusted returns of alternative investments.
Positive – Paying off a mortgage early provides a guaranteed return
A key advantage of using extra cash to reduce mortgage principal is the certainty of the return. Paying off a mortgage early effectively delivers a guaranteed, risk-free return equivalent to the mortgage interest rate you avoid.
Unlike many investments where returns fluctuate and are uncertain, the “return” from mortgage prepayment is known and stable: you permanently reduce future interest costs and monthly obligations.
Negative – Concentration risk: too much wealth tied to one asset
One reason to hesitate before funneling most of your savings into a mortgage is concentration risk. If most of your net worth becomes one large, illiquid asset—your home—you may be exposed if circumstances change.
If you haven’t built sufficient emergency savings or retirement accounts, putting large sums into home equity could leave you short of liquid funds to handle job loss, medical expenses, or other urgent needs. Having a balanced mix of liquid savings, retirement investments, and home equity generally improves financial flexibility.
Positive – Cash purchases simplify buying and can be attractive to sellers
If you have the cash to buy a home outright, you can avoid the mortgage application process and the uncertainty that sometimes accompanies it. Cash offers are often more appealing to sellers because they eliminate the risk of loan delays or application denials, and they can speed up closing.
Cash buyers may gain negotiation leverage, potentially securing a lower purchase price or having their offer chosen over competing financed offers. For self-employed buyers who face stricter lending scrutiny, paying cash can bypass the challenges of mortgage approval altogether.
How to decide: factors to weigh
Choosing whether to focus on a larger down payment, paying off your mortgage early, or prioritizing retirement savings depends on several personal factors:
- Mortgage interest rate vs. expected investment returns: Compare your mortgage rate to conservative projections for investments after taxes and fees.
- Emergency savings and liquidity: Maintain an accessible emergency fund before locking up too much cash in home equity.
- Retirement readiness: If your retirement accounts are underfunded, increasing retirement contributions can offer long-term benefits and tax advantages.
- Risk tolerance: If you value certainty and reduced monthly obligations, paying down the mortgage may provide peace of mind. If you accept market volatility for potentially higher returns, investing may be preferable.
- Employment stability and access to credit: Self-employed borrowers should account for lending requirements and possible difficulty securing mortgages in the future.
- Tax considerations and other debts: Factor in tax benefits of mortgage interest (if applicable) and prioritize paying off higher-interest debt first.
Final thoughts
There’s no universal right answer. For many, a balanced approach works best: aim for a down payment that avoids PMI (commonly 20% or more), preserve liquidity for emergencies, and continue to fund retirement accounts. After those priorities are in place, consider applying extra funds toward the mortgage if you value the guaranteed return and lower monthly obligations.
If you already have strong retirement savings, an emergency fund, and manageable other debts, accelerating mortgage paydown or buying in cash could be a sensible goal. If not, shifting focus to retirement and liquid savings may better serve long-term financial health.
Are you thinking about paying off your mortgage early? Why or why not?