The single, biggest debt most people carry? A home loan.
It's also the longest-term debt. With average mortgage terms spanning 20 to 30 years, you’ll be paying on your home for decades. You can check out your payoff terms by using a calculator at one of the many financial information websites.
By paying off your home loan early, you can work toward other financial goals and have an asset in your name that you completely own.
So, what are the top reasons to pay off your mortgage early?
#1 Reason To Pay Off Your Mortgage Early: Save on Interest
The real estate market has been unstable since the market crash in 2007. The resulting shock waves have made it harder for homeowners to get new loans with better terms.
Refinancing a current loan to get lower rates has also become much more difficult than it was in the past. Declining property values mean your home may be worth less than what you paid for it. Lower property value hurts your chances at refinance.
If you can’t refinance for a lower rate, you’re stuck with payments calculated at your current rate. The longer you have to pay, the more interest you’ll pay. Paying off the loan early will save you interest.
The potential savings could be huge -- massive -- depending on your interest rate and total loan balance.
What could you do with the mortgage interest you're saving?
Use your savings to build other investments and create income opportunities. For example, at bare minimum, you could put the extra money into a savings account.
Earn interest instead of pay interest.
Free up the money you’re otherwise giving to a lender.
What if that mortgage payment was going to your retirement savings instead of the lender? Don't start spending that money you're no longer paying to the lender. Don't change your budget. Save that mortgage money instead of spending it.
For example, if your loan payment was $1000 each month, deposit that $1000 into a savings account after you’ve paid off your mortgage and your budget would remain the same.
Warnings About Paying Off Your Mortgage Early: Prepayment Penalties, Etc.
Warnings: Check your loan documents carefully. You might have a prepayment penalty that will outweigh or seriously impact your savings if you pay the loan early.
A prepayment penalty is an amount you agreed to pay to the lender if you paid off your loan before its term ended.
Prepayment amounts vary by lender. Some prepayment penalties decrease over the term of the loan. For example, the penalty if you pay off your loan after five years might be lower than the penalty for paying during the first four years.
Calculate your prepayment penalty before you pay the loan off so you don’t get hit with a surprise bill. Speak to your lender if you need help in estimating your penalty.
Summary: What are the Pros and Cons of Paying off Your Mortgage Early?
Pros of Paying off Your Mortgage Early
(1) Eliminate your monthly mortgage payment. Free up extra funds on a monthly basis to help cash flow.
(2) Potentially save thousands of dollars in interest. If you can actually save on interest, this is huge.
(3) Get the peace of mind of owning your home outright.
(4) Tap the equity in your home. This can either provide money in the future or capital for reinvestment.
Cons of Paying off Your Mortgage Early
(1) You're tying up a huge chunk of your liquidity and net worth in your home. This makes it harder to access this value later.
(2) Opportunity Cost: You may miss out on potentially higher returns from other uses of your money and investments.
(3) Wave bye-bye to the federal mortgage interest tax deduction.
(4) Your house as your biggest asset may also be dangerous. If the market drops and you have to sell quickly, your greatest asset could become a net loss.
Adapted from an original article by Karl Thompson
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