Should you pay off your mortgage early? It's hard to argue against the sense of freedom and accomplishment a homeowner feels when they make their last mortgage payment. A borrower on a 30-year loan can add $150 to their monthly payments on a $250,000 mortgage and slash the payoff time by four years. Doubling payments on the loan can cut the term to just over nine years. Or, they can pay it all off at once with savings and eliminate the debt entirely, re-directing the monthly payment into investments. So why not do it immediately?
Consequences When You Pay Off the Mortgage Early
To help make an informed decision, the homeowner needs to look at their precise financial standing, especially when it comes to good and bad debt. One quick determination should find that there's little advantage to paying off a mortgage if the consumer has substantial bad debt in the form of high interest credit card accounts. Unless homeowners can earn higher returns on investments, along with the risks associated with participating in an unsteady market, holding onto the mortgage may make better sense. Before making any moves to pay off a mortgage, homeowners should assess their savings, retirement income, current investments and other nest eggs.
The Pros of Paying off a Mortgage Early
It can be attractive to pay off early when a homeowner has funds stagnating in low interest money market accounts or CDs earning a paltry 2 percent. LendingTree's mortgage calculator can do the math in predicting the savings in paying off a mortgage ahead of schedule. Generally speaking, the higher the mortgage rate, the greater the advantages of paying it off early. Reasons to consider an early payoff include:
Financial freedom. Homeowners without the monthly mortgage payments can invest the amounts they were paying in vacationing, paying medical expenses, or building education accounts for children or grandchildren. Another wise use of mortgage savings would be to purchase better disability or long-term health insurance to complement government retirement programs.
More money for retirement. Eliminating debt is one of the more secure ways of preparing for retirement. Paying off a mortgage early can dramatically increase the speed for earning the amount an individual needs to retire. LendingTree determined that by adding $175 monthly to a 401(k) account (instead of making a mortgage payment), based over a matching 50 percent contribution from an employer over the time of a 30-year mortgage, the homeowner could sock away $145,000.
The Negatives of Early Payoffs
Any attempt to reduce the amount a borrower is putting into a 401(k) to pay off a mortgage can be a critical mistake over the long haul. And the investment income from redirecting mortgage payments must substantiate risking the variability of the stock market. Here are some things to consider when evaluating an early payoff:
Harming liquidity. Consumer Reports advises heavily against paying off a mortgage early if it will leave you strapped for cash. Using available cash now to pay off a mortgage early can leave those without substantial savings vulnerable to emergency expenses.
Poor returns on investment. To make the most of a home mortgage rate if retired early, the income after taxes on invested index funds, for example, would have to be above the loan rate consistently over the term of the mortgage. However, the homeowner would have to invest prudently without impinging on the levels of savings and retirement accounts. Too often, the advantage is too small to consider.
Before making any decisions on paying off a mortgage, homeowners should check with their tax advisors or accountants to really work the numbers.