Should I Pay Off My Mortgage Early?
Homeowners often decide to pay their mortgages off early to reduce the total cost of the mortgage loan. They must consider various factors before making this decision such as the loans interest rate and their other available investment options. Other factors to consider when paying off a mortgage loan include the homeowner’s other financial obligations, the need for liquidity and peace of mind.
Reasons To Pay Off Your Mortgage Early
A bi-weekly payment plan is a common method of paying a mortgage loan early. This method involves making half of the usual monthly mortgage payment every two weeks, instead of making the full payment once per month. Biweekly payments mean that homeowners pay the equivalent of 13 monthly payments in a year instead of 12, allowing them to pay off the mortgage loan more quickly.
Paying off a mortgage loan early makes more sense when it has a high interest rate. However, homeowners must also consider the fact that the interest on a mortgage loan is tax deductible. This lowers the net cost of borrowing such that a loan with an interest rate of four percent may only have a net cost of three percent once the tax benefit is taken into account. An early payment plan is also more beneficial at the beginning of the loan’s term, since a homeowner is primarily paying off principal at the end of the term.
A homeowner must consider whether other investment opportunities will offer a higher return than paying the mortgage loan early. Withdrawing funds from an investment portfolio also requires the homeowner to pay taxes on it, which makes low-interest sources such as a savings account a good choice for obtaining the necessary funds. Investment experts also recommend retirement accounts such as a 401(k), which uses pretax money.
Financial obligations such as credit card debt may provide a better use of money than paying off a mortgage loan early. These debts typically carry a high interest rate, and should therefore have a high priority when it comes to repaying them. Homeowners who will need to make a major purchase before the end of the original loan term may be better off with the original payment schedule.
Need for Liquidity
Homeowners should also consider their need for assets that can easily be converted into cash before paying off a mortgage loan. Unexpected monthly expenses or a genuine emergency may require liquid assets such as an investment account or savings account. Homeowners with less job security should also consider maintaining a larger liquidity cushion. An early payment plan that involves extra payments each month provides greater flexibility than simply making a single lump sum payment. Homeowners may also wish to repay the mortgage and use that equity to obtain a line of credit if they expect interest rates to decrease over the term of the mortgage loan.
Peace of Mind
Many homeowners also achieve a sense of security when they owned their home outright. The feeling of not having any debt when entering retirement, along with reducing monthly expenses provides a homeowner with much greater flexibility in paying off a mortgage. However, this strategy only makes sense for homeowners who plan to remain in the house for a long period of time.
Are you already paying off your mortgage earlier?
Are you currently or have you already paid off your mortgage earlier than your original loan? How have you benefited from this action? Please let us know… we would love to hear your thoughts. We will reply back in a timely manner to all comments, and answer any questions you may have.