Having a mortgage is a lot of pressure. You have a substantial amount of debt hanging over your head, often for decades. Most people would like to find a way to reduce that debt and even pay off their mortgage early. They decide to use money from an inheritance, selling a vehicle, or from their savings to pay off their debt early, so they can get out from under the mortgage.
However, is this a good idea or not? It’s always a good idea to take some time to determine whether it’s the best financial choice or not. Even though it might seem like a good option, it doesn’t always mean that it’s the soundest financial decision to make.
What Are the Pros?
First, we’ll be looking at some of the biggest benefits that can come from paying your mortgage off early.
Helpful for Those on a Limited Income
The amount of money you are paying each month on your mortgage might be a substantial portion of your income. If you can pay off your mortgage, this could allow you to free up quite a bit of additional money each month that could be used for other expenses, investing, etc.
Save Money on Interest
How much are you spending on interest on your property? Over the course of the loan, you could be spending many thousands of dollars on interest. When you pay off the mortgage early, you will no longer have to worry about the interest. You won’t be able to use the mortgage interest tax deduction, but you could still end up saving a lot more in the long run.
Tap Into Home Equity Later If Needed
When you have a home that you own, you can still tap into your home’s equity later if you need. With a paid-off property, you can use the home equity to pay for improvements to the home, repairs, debt consolidation, and more. You will simply leverage the equity in the home using the same types of options that someone who still has a mortgage would use.
Peace of Mind
Of course, one of the biggest benefits of paying off the mortgage early is that it can provide you with peace of mind. Owning your home and not having a monthly mortgage can feel like you’ve lifted the weight of the world off your shoulders.
What Are the Cons?
Of course, even though there are plenty of benefits when it comes to paying off your mortgage, there are some potential cons, as well. It’s important to understand those cons before you make your decision.
Reduced Retirement Savings
Sometimes, people opt to pay down their mortgage while ignoring other uses for their money that could be better for them financially. For example, if you aren’t putting enough money into your retirement accounts, you may find that even though you own your home, you don’t have enough saved for retirement.
Low Cash Reserves
If you are spending all of the money in your savings to pay off your mortgage, what would happen if you suddenly had an emergency? You don’t want to spend everything you have just to pay off the mortgage. Ideally, you will have enough money saved to cover between three and six months’ worth of expenses in case you have an emergency.
You don’t want to get into a situation where you own the home, but you can’t pay for an emergency that crops up. Only pay off your mortgage when you have plenty of money saved.
Higher-Interest Debt Continues to Accrue
Do you have other debt that has a higher interest rate than the rate for your home? This might be credit cards, for example. If you continue to keep a large balance on your credit cards, you are paying substantial interest rates on them. This is interest that you can’t deduct as you can with mortgage interest.
It’s better to pay off your credit card debt and any other high-interest debt you have before thinking about paying off your mortgage.
In some cases, a mortgage will have a prepayment penalty. This means that you will have to pay an additional fee if you decide you want to pay off your mortgage early. While this might seem strange, you have to remember that the lender wants to get as much interest as they can. If you pay off early, you are eliminating this interest, so these types of fees are charged.
If you are considering paying off early, check to see what type of prepayment penalty might be involved. You may find that it’s cheaper to keep the mortgage and to continue paying.
In Some Cases, Refinancing Might Be a Better Option
You might find that instead of paying off the mortgage, you could refinance it to get a better interest rate. If you can get a good rate, this can lower the amount that you are paying on the property. Just make sure that you do a full analysis to see whether refinancing is a good option for you or not. If you can get a better rate and a better monthly payment, it could be a good alternative to paying off your mortgage early.
Talk with a Financial Advisor
If you still aren’t sure whether you should pay off your mortgage early, you might want to speak with a financial professional. They can look at your finances and help to determine the best course of action. For example, depending on the rate, you might find that it would be possible to make money by investing what you were going to use to pay down the mortgage.
Many times, it’s better to invest in places other than your mortgage. However, it might be better to pay off the mortgage for some homeowners. Those who have trouble keeping money in the bank might find that it is a better option for them. The home will act as a savings tool. Everyone’s financial situation is different. If you aren’t sure what to do, get some advice from someone in the know.