Paying Off Your Mortgage Early
You have a mortgage stretching in front of you for years and even decades which you'd love to pay off early, but should you? It seems to make sense to get rid of that big expenditure of interest, but it doesn't always. Determine what makes sense for you and your situation before you put your raise, savings, or inheritance toward an early pay off.
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You might come out further ahead financially by investing that money than you would save in interest by applying it to your mortgage. Alternatively paying off your mortgage may give you more peace of mind and provide cash flow for other opportunities.
There is a lot to consider when deciding if paying off your mortgage early is your best decision. Typically, the first consideration is whether to pay off your mortgage or invest that money elsewhere. Today, many mortgage rates are below 5.5%. The S&P 500 has had an annualized return of approximately 10% over the last 90 years. This difference points to the likelihood of making more money by wise stock investments than you would save by eliminating interest payments by paying off your mortgage early with that money. Keep in mind that there is no guarantee with any investment, they all have risks.
Another consideration is the liquidity of your assets. Your home is a not a liquid asset. If you pay off your mortgage too quickly you can deplete your liquidity. It is important to have liquidity with an emergency fund. Most of us need emergency savings covering 6 – 9 months of expenses for an unexpected financial need.
If you don't pay off your mortgage early what will you do with that available money? Will you invest it in other ways? Will you spend it? If you don't use it for other investments it might be wise to make extra mortgage payments with it. This can be a forced savings for you while building greater equity in your home and can save you thousands of dollars in interest. Different approaches work for different people!
Paying off a mortgage isn't always a financial decision. A paid off home can give tremendous peace of mind. It can provide great emotional comfort when thinking about retiring and living on a fixed income. It might allow for better budgeting.
Having a lot of equity in your home can allow you to have a home equity line of credit (HELOC). A HELOC can give you an emergency income as well as provide for home improvements. A HELOC you use for home repairs or additions might be tax deductible.
If you decide to pay off your mortgage early, do it wisely. Pay off high-interest debt first. Credit card debt, personal loans, and car loans typically have higher interest rates and aren't tax-deductible. Make sure you are investing in retirement accounts such as a 401(k) or IRA. Have an emergency savings plan. Assess and work toward your other financial goals. Remember you can make extra mortgage payments before you are ready to completely pay your mortgage off. Be sure to check for mortgage prepayment penalties. If there is a fee, make sure you still come out ahead after paying a penalty.
When deciding whether to pay off a mortgage early decide what works best for you. Keep in mind how you can best reach your financial goals and just as importantly what makes you most comfortable. Feel good about where your money goes, don't only rely on the numbers. Meeting with your financial advisor can help you make this decision.