Many homeowners dream of paying their mortgage off early. Whether you want to entire retirement debt free or you just like the thought of such a large amount of equity in your possession, it is possible to pay your mortgage off before its maturity date. Today mortgage loans don’t come with prepayment penalties, so it’s easier than ever to pay that pesky loan off in full.
Should you pay your loan off early, though? There are some compelling reasons to do so that outweighs the negatives of paying the loan off early. Keep reading for the top five reasons you may want to consider it.
Lower the Cost of Interest
Perhaps the largest reason to pay your mortgage off early is to sidestep the pesky interest you pay. It’s not unusual to pay many thousands of dollars in interest on a mortgage loan if you keep it for its entire term. Paying the loan off sooner, though, helps lower that cost.
When you first start making mortgage payments, you pay mostly interest. As disheartening as that is, there are ways to hit the principal. You just have to make extra payments. It doesn’t have to be a lot; even $100 a month can put a dent in your principal faster. The lower the principal balance, the less you’ll pay in interest each month. It’s a cumulative effect that eventually leads to much less interest paid and faster pay down of the principal.
Reduce Your Debt During Retirement
Once you are on a fixed income, having a large mortgage payment each month can be stressful. If you pay the mortgage off before you hit retirement, you eliminate that stress from your life. If you do this, you won’t have to worry as much about your monthly income stream during retirement.
Even if you took out a loan with a term that would end before you retired, you may still have mortgage payments beyond that date if you refinanced. If you didn’t lower your loan’s term when you refinanced, you started from scratch all over again. This could extend the date that you’ll be mortgage-free into your retirement years. Paying that debt off before you retire can take a large burden off your shoulders. In some cases, it may even allow you to retire sooner.
Increase Your Savings
Paying the principal on your mortgage is a form of forced savings or investment account. If you can’t bring yourself to invest in stocks, bonds, or even CDs, consider your mortgage payments an investment. Let’s say you pay an extra $200 per month towards your mortgage. You will knock down your principal balance and increase your equity by $2,400 per year. If you combine that increase with the appreciation your home’s value takes each year, you can see a decent return on your investment.
Of course, every investment has risks, so don’t assume you are investing in something safe. As we saw from the housing crisis, house prices can plummet, leaving you with a loss rather than a gain. In general, though, investing in real estate isn’t any riskier than putting your money in the stock market. It’s often easier on the mind to invest in real estate rather than stocks, though, because real estate values don’t change on a daily basis.
No More Tax Break on Home Equity Loans and Lines of Credit
Prior to 2018’s tax year, homeowners could deduct the interest on the first $100,000 of a home equity loan or line of credit. From tax year 2018 and on, though, this benefit disappears. This decreases the benefit of having a home equity loan or line of credit.
If you have the extra money to pay the home equity loan or HELOC down, you can reduce the total interest you pay. This can help offset the deduction you no longer receive when filing your taxes. It also helps to increase the equity you have in your home, therefore increasing your net worth at the same time.
Lower the Risk of Losing Your Home
The final benefit is the lower risk of foreclosure. Of course, any homeowner can lose their home no matter how much equity they have in it if they stop making their payments. But, there’s a benefit of having a higher amount of equity. If you find yourself in financial trouble, you can sell the home yourself and pay the loan off in full. You can then rent or buy something that will have a smaller mortgage payment (or none at all).
If you compare the option of investing in the stock market to investing in your home, there’s a safer element of investing in your home. If your home loses value, you still have a home to live in. Yes, you lost your investment, but not the roof over your head. If you invest in the stock market and it dives, you lose all of your money and you may not have the money to keep up with your mortgage payments. This could result in losing that roof over your head.
Of course, paying off your mortgage early is a personal decision. You should weigh the pros and cons of paying it off to see if it works for you. Keep in mind that if you start making extra payments, but then cannot afford it for a few months, you are not penalized. Making extra payments is completely by choice, which increases the flexibility you have to pay your mortgage off in full earlier than expected.