Should You Pay Off Your Mortgage Early?

Whether or not to pay off your mortgage early is a question many homeowners are wrestling with. Unfortunately, there is no answer to fit every situation. You should base your decision on your individual situation and long term financial goals. Although paying of your mortgage faster may not be the best way to go for everyone, you have to admit that the numbers can be pretty impressive. If you have a $250,000 mortgage for 30 years at 6%, simply paying an extra $100 toward your principle every month will save you about $51,000 over the course of the loan. With savings like this, why would you not want to pay down your principle quickly?

If you are financially sound in the other areas of your life, there are many reasons why paying off your mortgage sooner is a good idea.

If you plan on staying in your home for a long time, you will end up paying less interest in the long run. If paying $100 toward your loan every month can save you $51,000, imagine what paying $250 every month can save you. Not only will you reduce the interest that you pay, you will also shorten the length of your loan by several years. An extra $100 per month will shorten your loan term by 4 1/2 years and an extra $250 per month will allow you to pay off your mortgage 9 years earlier.

More financial freedom is another benefit of paying down your mortgage. Even if you don’t have other debt, your mortgage eats up a significant amount of your monthly income. Once you eliminate your mortgage payment, all you have to pay for is your taxes, food and other basic necessities. You can then invest your money or use it for hobbies, travel or other interests. In fact, if your bills are low enough, you may not even need to hold a regular job at all.

If you are nearing retirement, paying off your mortgage is a good thing because you will be living on a reduced income. Not having a large mortgage payment will allow you truly enjoy your retirement instead of stressing over how you are going to pay the bills.

The satisfaction of being debt free is one reason many homeowners choose to pay off their mortgage early. The knowledge that your home is yours and not owned by a bank is priceless.

The amount you can save by paying off your mortgage early is only part of the picture, and can often be misleading. There are some other things you need to consider.

Before you should even consider putting extra money toward your mortgage, make sure you have eliminated your other debts first. Make extra payments toward your credit cards, car loans and personal loans to pay them off.

Make sure you save enough for the future. Maximize your contributions to your retirement plan, especially if your employer will match. Also, if you will be helping your children pay for college, make sure you are contributing toward an educational savings plan such as the 529 Plan. If you have to take out a loan to pay for college, you will negate much of the savings you gained by paying down your mortgage.

When you pay extra money toward your principle, you no longer have access to it. If you were to lose your job or have unexpected medical expenses, you would not be able to get to that money quickly to help with the bills. While you may think a home equity loan is always an option, few banks will give loan to someone who is unemployed and doesn’t have the means to pay it back. Before you begin paying extra money toward your home loan principle, make sure you have enough of a reserve in your savings account to see you through several months of unemployment and to cover any other emergency expenses.

The real world value of the money you would save goes down over time due to inflation. The amount of interest you save is over the course of the entire loan and you won’t be able to reap the benefits until that loan is paid off. So, using the example above, the $51,000 that you would save is worth more now than in 25 years when you actually pay off the mortgage.

You may be able to invest the money and get a greater rate of return than you would by reducing the amount of interest you pay on your home loan. Keep in mind, however, that investing is often risky and there is no guarantee that you will come out ahead in the end. The interest on a home loan is tax deductible, so be sure to take the amount you save on your taxes into account when you are deciding whether or not to pay of your mortgage faster or invest.

If you are on the brink of foreclosure, you should not pay more toward your mortgage because if you lose your home, you also lose all of the extra payments you made. Use the extra money to build up a reserve fund or pay down your other debt instead.

When you are deciding whether or not you should pay off your mortgage early, consider all of your options carefully. Do some research, compare the pros and cons of each choice and talk with an investment specialist if necessary. Everyone’s situation is different and only you can decide which path is right for you.