As you explore options to get out of debt and get your financial house in order, your home becomes one of the biggest question marks you may face along the way. The question of whether to pay off your mortgage early is one that looms large for many people looking at thirty years of house payments and an uncertain future ahead of them.
The idea of completely owning your home is certainly tempting. However, is it the right move to make at this stage of the game? Unfortunately, the answer is not a simple yes or no for everyone. It depends on a variety of factors. Consider all the details below and weigh your decision carefully.
Pros and Cons
There are many pros and cons to keep in mind when it comes to paying off your mortgage early. These things can have a significant impact on your financial future, so it is important to put careful thought into the best course of action for you to take as an individual or part of a family. Some of the pros include:
- Peace of mind. There’s no denying the relief you will feel knowing that your home is secure for the future. Peace of mind is a huge benefit.
- Interest savings. Depending on the price of your home and the interest rate you are paying on your loan, you can save a substantial chunk of change by paying off your mortgage five or ten years early.
- More money to invest in other pursuits. If saving for the future is your goal, an early pay off of your mortgage allows you to free up those funds each month to make investments or to put towards your retirement.
- Extra money to live on each month. If you are like many people, your mortgage accounts for a relatively large portion of your monthly expenses. Eliminate that payment, and you have extra money to save and a little bit to play with each month as well.
These reasons are sound reasons to consider paying off your mortgage early. That does not mean there aren’t a few considerations to keep in mind that might discourage you from paying off your mortgage early as well. Therefore, consider these items as well before you decide to go all in for early mortgage repayment.
- Potential penalties. Some mortgages have penalties for early repayment. Read the fine print before you decide to pay off yours – the costs could be higher than you anticipate.
- Better uses of your money. Your mortgage, while it may be the biggest loan you have, may not be the most significant financial liability you owe. If you have credit cards, car loans, and similar unsecured debt, it may be a better use of your resources to repay those debts before paying off your mortgage. Even with accounts that have smaller balances, higher interest rates on outstanding balances can cost you considerably more over time. Eliminate these debts before considering removing your mortgage from the equation.
- Tax benefits. When you pay off your mortgage, you eliminate a rather substantial tax benefit in the mortgage interest deduction. While that may not be important today, if you will continue to have a mortgage once you retire, it may become significant.
Because there are some compelling pros and cons to consider when deciding whether or not to pay off your mortgage early, you might want to work with a financial advisor. Your advisor can help you determine the most judicious use of your resources for delivering a better return on investment for your financial outlook.
Alternative Uses of Funds
What will you do with the extra money you save by paying off your mortgage early? That is a reasonable question to ask. If you do not have a specific use for the money or a reason for an early pay off, then it might be worth waiting until you do have a particular reason for doing so. Some alternative uses of those funds may include things like:
- Education funds for children.
- Starting a business.
- Investing in other business ventures.
- Retirement savings.
You might even find that you wish to pay off your mortgage so that you can buy an investment property or a vacation home. The key is to have a reason in mind
Life Stage Decisions
The bottom line is that if you are young when you purchase your home, it makes more financial sense to pay extra each month toward your mortgage. Later in life, it makes less sense – especially if you believe you will not live in your home long enough to pay it off completely.
The key is to make the decision that makes the most financial sense for your situation, your stage in life, and for helping you achieve your financial goals for the future. A financial advisor can help you sort out the details and make the decision that works best for your unique needs.