Every homeowner anticipates the day when their mortgage balance hits zero, and they are in full ownership of their home. Just the thought of eliminating the burden of a monthly mortgage payment is enough to encourage any borrower to pay off their mortgage ahead of schedule. If you are planning to make extra payments in hopes of paying off your mortgage early, there are a few pros and cons to weigh before moving forward.
Pros of paying off early
Eliminate your monthly payments.
Once your mortgage balance is down to zero, you will no longer have to pay that monthly bill. This means a few hundred or even thousands of dollars back in your budget each month.
Save money on interest.
The longer your mortgage is being paid off, the more interest you’re paying over time. The earlier you pay off the balance, the less interest you’ll be paying over the life of the loan, ultimately saving you potentially thousands of dollars.
Better for retirement.
When you’re ready to move on to the next stage of your life and head into retirement, not having a mortgage can mean more money in your pocket. With retirement usually comes a fixed income, so the less you need to spend out-of-pocket on bills, the better.
More available equity in your home.
The more equity you have in your home, the more money you may qualify to borrow in the future for any major renovations you may want to do. Home equity is the value of your home minus your mortgage balance. The more money you have as equity, the more you can get back in re-sale as well as if you choose to borrow funds using a home equity loan or line of credit.
Peace of mind.
Arguably the best part of paying down your mortgage is the peace of mind you have knowing that you are the sole owner of the property. This means that there are no more liens on your home, and it’s no longer collateral.
Cons of paying off early
No more tax deductions.
If you claim the interest-paid tax deduction each year, you’re no longer eligible for this once you pay off your mortgage.
Ties up your liquidity in your home.
A liquid asset means the asset can be turned into cash without affecting its market value, such as cash and checking or savings accounts. If you’re spending all of your available funds on your home, you no longer have those liquid cash or account assets. Be careful not to invest more than you can afford because you won’t get that money back until you sell.
Reduces opportunity for a better return on investment
Before allocating extra funds to additional mortgage payments, consider all other avenues in which that extra cash can provide a better return. Options to consider and prioritize include:
- Pay off high-interest debt – Student loans, car payments, credit cards, etc. Be sure to eliminate all high-interest debt before you consider making additional mortgage payments.
- Invest 15% of your income into a 401(k) or Roth IRA. If you aren’t contributing 15% of your income to your retirement savings, plan to prioritize your additional funds to support your retirement goals.
- Determine if you need to prioritize other savings goals (i.e., college savings fund for your family).
- Consider investing in the stock market to get a better return on investment. The historical average stock market return is 10%. The rate of return can vary over time depending on a variety of factors, but a return of 6%-7% would still be more beneficial than a 4% return from paying off a mortgage. It’s important to note that we are not professional investment advisors. Be sure to consult with an expert to determine if a stock market investment is right for you.
What option is right for you?
Even though we wish there were a definitive answer to this question, the truth is that it all depends on your financial situation. To start, you should take a good look at your monthly expenses and determine how much expendable income you have and what you’re willing to cut. Ask yourself questions like, “Is it better to pay off the mortgage or save money?” or “Would I be investing more than I can afford right now?”
Even though the number of years it takes to pay off a home can seem daunting, for some, a steady marathon to the finish line makes more financial sense than a sprint. Be honest with yourself about your financial situation and make sure you understand both the great positives and potential negatives.
As always, we’re here to answer any questions you have and help guide you through the process. Give us a call or start your application today.