When you buy a home with a mortgage, it is natural to want to pay off the mortgage early instead of letting it hang over your head like the Damocles Sword for years and years. This can be especially disconcerting when you are preparing for retirement. Naturally, you want to to pay off all your dues as early as possible.
However, before you even start thinking of using your savings, inheritance, and a raise from your job to pay the mortgage off early, it is important that you take a few steps back to determine whether doing so will prove beneficial or not. As you will learn, there are several Do’s and Don’ts to a home loan.
Here’s something for you to know: the amount you save on interest on paying off your mortgage early may not be more than your earnings if you had invested the same money elsewhere instead of early repayment. In such a case, early repayment is not that financially sensible, right?
However, there is also the thing that early repayment of your mortgage gives you a lot of peace of mind. After all, after paying off the loan, you are now free to profit from other investments, and you don’t have to worry about the monthly investments.
To help you to make a decision, here are a few things you need to know, courtesy of mymoneykarma:
Is using money for investing better than early mortgage repayment?
So what really happens when you decide to invest your money somewhere else?
Richard Bowen, CPA and the owner of Bowen Accounting, California, says that it not just makes more sense but it is also more financially viable to invest somewhere else.
Here’s what happens:
Most mortgages have interest rates between 3.5% and 5.5%. This means that the returns you can get after an early repayment is generally the same as your interest rate. This is lackluster to say the least. On the other hand, the annual returns for S&P 500 is around 10%.
In addition, while making such investments, you can take out the cash from dividends etc. to start paying off your mortgage and thus transfer it into a cash-flow positive property. These have a potential to get greater returns in the long term.
However, here’s a word of caution: Investments may give greater returns and interest rates, but also carry risks. You can invest a lot on the market and end up losing it. Even investing in real estate is not without risks.
There’s a potential downside to paying off the home loan early on as well.
After an early repayment, the price of the property takes a plunge, leaving you in considerable loss. After all, buying a home is investing in real estate too.
So at the end of the day, consider carefully which road you’ll take as both have certain risks.
Do you want all your money to be tied up in repaying mortgage?
Before you decide to use a large part of your savings to repay the mortgage early, consider the liquidity factor. A property is a non-liquid asset. It can take years to sell it off for some capital.
You are depleting your cash reserves - money that you may need later on - for early repayment of the mortgage.
A possible solution:
Here’s a good solution for such situations, but it’ll need some planning and consistent effort on your part. You’ll have to build an emergency fund, in addition to mutual funds, treasury bills, stocks, marketable securities, and other tangible assets.
Thus, while you are giving money for early repayment, you’re also investing money in tax-advantage retirement accounts and the property, thereby having enough liquid cash from investments to have liquid cash in case of emergencies.
It is best to have a 6-month safety cushion to protect yourself during emergencies.
So how will you want to use the money if not for early mortgage repayment?
Time to be brutally realistic. If you don’t use the money for an early mortgage repayment, where will you use it?
If you struggle to keep money intact in the bank, or if you have a habit of spending money quickly, it may make more sense to pay off the mortgage early.
An early repayment of your mortgage will save you thousands in interest over time, and shall additionally help you build a property equity faster.
How important is peace of mind to you?
Let’s face it. Sometimes, peace of mind is the only thing that matters.
It brings a great deal of mental peace to know you don’t have to pay mortgage EMIs anymore, and that now your funds are not tied down. For those saving for retirement, this is very true.
Doing so may not carry much financial potential, but peace of mind can certainly not be measured in terms of money. Paying back the home loan means you can:
Establish a home equity faster
Develop an emergency fund or emergency income source
Make home improvements sooner
So what do you think? Is it more worthwhile to pay off the mortgage, or to invest instead?
FAQs
It might make sense, for example, to put the money into paying off your mortgage early if you struggle with keeping money in the bank. Your home can be a forced-savings tool, and making extra mortgage payments can save you thousands of dollars in interest over time, plus help you build equity in your home faster.
Is it ever worth paying off mortgage early? ›
You might want to pay off your mortgage early if …
You want to save on interest payments: Depending on a home loan's size, interest rate, and term, the interest can cost hundreds of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses.
What does Dave Ramsey say about paying off your house? ›
The Dave Ramsey mortgage plan encourages homeowners to aggressively pay off their mortgages early, however. One recommendation Ramsey makes is to convert your 30-year mortgage into a fixed-rate, 15-year home loan. Not only will you pay off a 15-year mortgage in half the time, but you'll also pay much less in interest.
How to pay off a 30 year mortgage in 5 7 years? ›
There are some easy steps to follow to make your mortgage disappear in five years or so.
- Setting a Target Date. ...
- Making a Higher Down Payment. ...
- Choosing a Shorter Home Loan Term. ...
- Making Larger or More Frequent Payments. ...
- Spending Less on Other Things. ...
- Increasing Income.
It's important to know that paying off a loan early doesn't impact your credit any differently than if you were to pay it off on time.
What is the best age to have your mortgage paid off? ›
A good goal is to be debt-free by retirement age, either 65 or earlier if you want. If you have other goals, such as taking a sabbatical or starting a business, you should make sure that your debt isn't going to hold you back.
What are the negative effects of paying off mortgage early? ›
If you pay off your mortgage early, you'll no longer have any mortgage interest to deduct on your tax return if you itemize your deductions. This change is most likely to affect you if you have a large mortgage, a high interest rate—or both—-and your annual interest payments are substantial.
Do millionaires pay off their mortgage? ›
Not only is there huge freedom in being completely debt-free and living in a paid-for house, but it's also a great way to build wealth—getting rid of your house payment leaves you with a ton of extra money each month to save for retirement. In fact, the average millionaire pays off their house in just 10.2 years.
What does Suze Orman say about paying off your mortgage? ›
Orman explained that if you have a 30-year mortgage and you've already made payments for 14 years, you should make it a point to get a refinanced mortgage paid off in 16 years. Otherwise, if you refinance for another 30 years, you'll end up paying for your mortgage with interest for 44 years in total.
What happens if I pay 2 extra mortgage payments a year? ›
Just making two extra mortgage payments a year can save you tens of thousands of dollars and cut years off your loan.
If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.
What happens if I pay an extra $2000 a month on my mortgage? ›
The additional amount will reduce the principal on your mortgage, as well as the total amount of interest you will pay, and the number of payments.
What happens if I pay an extra $500 a month on my mortgage? ›
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.
What happens after you fully pay off your mortgage? ›
Key Takeaways. Once your mortgage is paid off, you'll receive a confirmation from your lender. You're now responsible for paying your homeowners insurance and property taxes. Going forward, it's important to reassess your budget and financial goals.
Has anyone gotten a 850 credit score? ›
Although a lot of people might like the idea of a perfect credit score, they'd likely have a hard time actually achieving it. In the U.S., only about 1.7 percent of the scorable population had a perfect 850 FICO credit score in April 2023, according to FICO data.
Does paying off your mortgage affect your home insurance? ›
You'll become responsible for paying your home insurance.
Mortgage lenders require you to carry property insurance to protect themselves in case your house—which is also collateral on their loan—is damaged or destroyed by fire, natural disaster or other calamity.
Why does it take 30 years to pay off $150 000 loan? ›
Answer and Explanation: The interest rate on a loan directly affects the duration of a loan. Note: The interest rate is calculated using the hit and trial method. Therefore, it takes 30 years to complete the loan of $150,000 with $1,000 per monthly installment at a 0.585% monthly interest rate.
How many people pay off their mortgage early? ›
Thus, it's not uncommon for Americans to want to pay that debt down as fast as possible. In fact, according to Census Bureau data, nearly 40% of Americans already have. But are you really better off paying off your home mortgage, or are there strategies you can employ to put yourself ahead even more?
Is it better to finish paying off your house or keep paying mortgage? ›
If it's expensive debt (that is, with a high interest rate) and you already have some liquid assets like an emergency fund, then pay it off. If it's cheap debt (a low interest rate) and you have a good history of staying within a budget, then maintaining the mortgage and investing might be an option.
What happens if I pay an extra $200 a month on my mortgage? ›
If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000. Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment.
