Does Paying a Mortgage Off Early Make Sense?

Does Paying a Mortgage Off Early Make Sense?

Posted: 2019-07-10 | Author: Richard Simon

Many homeowners have the worthy goal of paying off their mortgage early and owning their home free and clear. Paying a mortgage off ahead of schedule can save you a lot of money in interest costs, and once paid off, your monthly housing expenses are reduced significantly. Mathematically, whether or not paying a mortgage off early makes sense is not a clear-cut decision. There are distinct advantages to paying down your mortgage, but there are also advantages in using the money for other purposes.

The Benefits of Paying a Mortgage Off Early
As we have already discussed, paying a mortgage off ahead of schedule can save you a lot of interest – potentially tens of thousands of dollars in interest costs over the life of the loan. And by having a strategy of paying down the principle of your mortgage at an accelerated rate, you can more quickly get rid of other costs associated with your mortgage, in particular, private mortgage insurance (PMI).

You also gain the benefit of reducing your monthly housing costs by 75% or more. Imagine not having that big payment hanging over your head every month. Imagine having to only come up with enough money for utilities, property taxes, groceries, transportation, and other monthly living costs. How would that change your life?

Would you be able to sleep better at night knowing that you own 100% of your home no bank is ever going to foreclose on you? It is hard to put a price on peace of mind, and this alone might outweigh all of the other factors in deciding whether or not to pay off your mortgage.

Another benefit that is closely tied to this is greater financial flexibility. When you get rid of a monthly payment that for most people is at least $1000 and in many cases as high as $2500 or more, you suddenly have a lot more disposable income. This gives you more money each month to put toward savings, investments, college for your kids, a vacation, or whatever else is on your wish list. Greater financial flexibility ultimately means more financial freedom, and a better quality of life.

Reasons to Consider Keeping your Mortgage
With all the tremendous benefits of paying off your mortgage early, you may be surprised to learn that there are some equally valid arguments for keeping your mortgage. You have limited monthly financial resources, so the question becomes, where are the best places to direct these resources? Sure, you can make extra payments on your mortgage. But you could also put more into your retirement account, for example.

If your IRA or 401K contributions are directed into funds that invest in blue chip S&P 500 companies, you should see an average rate of return of about 10% per year. This, compounded over several years, can return many times more (on your investment) than if you took the same amount of money and used it to pay down your mortgage. True, you could invest far more into retirement once your mortgage is paid off, but then you will have missed several years of compounded growth on your money.

Here are some other reasons to consider keeping your mortgage and paying it off at a regular rate:

  • Interest is Tax Deductible: Interest from home mortgages is the only type of interest that is tax deductible. If you have a mortgage and you itemize your tax deductions, you can write off your interest on your tax bill every year.
  • Other Investments Might Return More: Even if you have maxed out your retirement contributions, you might still be better off putting money into other investments rather than paying down your mortgage. Examples may include stocks, bonds, or purchasing additional real estate.
  • Other Debts Should take Priority: It should go without saying, but if you have any other debt besides your home mortgage (such as auto loans, student loans, credit cards, and personal loans), you should definitely pay these debts off first.
  • Having Something in Savings is Essential: Another area you should address before thinking about paying down your mortgage is your emergency savings. Emergencies come up in everyone’s life from time to time, and it is important to have something saved for when the need arises.

Speak with a Qualified Lending Specialist to Discuss your Mortgage Options
As with many financial decisions, whether or not it makes sense to pay off your mortgage early comes down to your individual circumstances. It is also important to note that there are many potential strategies for accomplishing this goal. For example, if you have a large lump sum from an inheritance, settlement, or severance package, you may be in a position to pay it off all at once. On the other hand, if you are looking do this over a period of time, you could make extra payments, pay your mortgage biweekly, refinance your current mortgage to a shorter term with a better interest rate, among other options.

To determine the right option for your situation, the best place to start is to speak with a local mortgage specialist. A local expert can sit down with you to thoroughly review your situation and help you decide which path to choose. And if it makes sense to refinance your mortgage, they can help you find the best loan program to fit your needs and goals.

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