Whether you’re making mortgage payments or paying rent, housing is probably a significant portion of your budget. Have you ever dreamt about what it would be like to finally own your home? With your loan paid off, your housing costs will plummet and you will be able to spend that extra money any way that you want. However, there are many pros and cons when it comes to paying off your home loan ahead of schedule. Although it would be a great relief to pay off your mortgage early, you might find that you’re better off sticking with the original timeline and investing the money you would have used to make bigger payments. Clearly there’s a lot to consider, so let’s get to it!
Should You Pay Off Your Mortgage Early?
Paying off a mortgage has become a part of the American dream. It’s an indication of success when you can say that you completely, indubitably, finally own your house. Many people would say that because it’s such a great accomplishment and relief, families should do it sooner rather than later if they’re able to afford the expense. However, this isn’t always the case. Sometimes, you really shouldn’t pay off your mortgage early.
WHY YOU SHOULDN’T
- There are many investment opportunities that outperform the low interest rates on mortgages. While it would be exciting and freeing to pay off your mortgage early, you might only be saving the (roughly) 3% interest rate you would have been paying on your mortgage each month. Finding an investment that makes you more than 3% a month isn’t difficult.
- When you pay off your mortgage, you lose the mortgage interest rate tax deduction.
- During the months you’re paying extra, you lose flexibility to spend your money in other ways.
- Once you pay it off, you own a very large asset that isn’t producing any income. If something happens (any emergency that heightens your expenses), you will struggle to get any money out of the house.
WHY YOU SHOULD
- Mortgage payments are usually a family’s biggest expense. Paying them off will free up your monthly budget.
- If your financial health is both fantastic and secure, you’re relieving yourself of more debt.
- You could take the money you would have spent on your mortgage’s interest rate and donate it to charity. This way, you’re contributing to a good cause and you can deduct the same amount from your taxes as before.
- You will likely feel satisfied, relieved, excited, and proud.
WHAT SHOULD YOU DO?
First, it’s important to fully analyze your current financial health and what you expect in the coming years before you make a decision. After that, you should compare the interest rate on the loan with the interest rate of a potential investment. Then, check that your mortgage doesn’t come with any pre-payment penalties that will hurt you for paying too much too soon. You should also think about that mortgage deduction; if you want to pay off your mortgage, you could always donate the same amount of money you were paying in interest to a charity, receiving a charitable tax deduction. Then, go ahead and factor your emotions into the equation. For some people, the happiness that comes with paying off a mortgage and freeing oneself from debt is worth losing a bit of money.
Finally, there are other financial goals that should always come before trying to pay off your mortgage early. These include:
- Maxing out a 401K (especially if your employer offers to match 50%) and retirement plans
- Paying off high-interest debt (whether credit card debt, automobile, etc.)
- Creating an emergency fund so that if the worse happens, all of your money isn’t tied up in the house
- Creating funds for your children’s education
If you meet all the requirements and feel that paying off your mortgage early is the best plan for you, start the process by talking to a trusted advisor or your mortgage lender. Good luck!