If you have a roof over your head (and you’re not renting), you’re probably paying a mortgage. Mortgages account for one of the most common loans Americans have. Like most people, you might also be dreaming about the day you’re free of this debt. And depending on your loan terms, that might take up to 30 years to come true. The long wait can be daunting and it’s natural to think about paying it off as soon as possible.
But how do you know if you should put your extra cash towards your loan payment? Is it actually smart to finish up your mortgage early? What steps can you take to help pay for your mortgage ahead of schedule? Let’s talk about it!
How Do You Know You’re Ready?
You Don’t Have Other Lingering Debts
If you have other debts, make sure that the interest rate on them is much lower than your mortgage payment. If it is higher, it might be better to focus on that first. Prolonging your payment on a loan that has a bigger interest rate would actually cost you more money in the long run. It is much better to close that door first before jumping into your mortgage.
You’re Aware of Pre-Payment Penalties
Consult your loan officer to know about the terms of your mortgage. In some cases, you might be required to pay a penalty for finishing up your loan early. This might be a percentage of your total mortgage, and you have to decide if that amount is worth paying. If it costs too much then paying off your mortgage early might not be worth it after all. It is also important to note that all loans are different, and this penalty might not be even in your contract. Revisit your loan agreement to know for sure.
You Have Extra Cash and an Emergency Fund
Maybe you’ve received a raise, gotten your annual bonus, or earned your inheritance. If this money is just something extra that you don’t have anywhere else to put into, paying off a chunk of your loan might be a good idea.
That’s provided that your emergency fund is safe and secure. Always make sure to set aside money for medical or family emergencies. You may consult your financial advisor for a good amount to save for the rainy days. If you don’t have that amount in your savings, place your extra cash in the emergency fund instead.
You’re Invested for Retirement
Paying off your home completely is just one of the gifts you can give yourself for retirement. After all, complete homeownership is your goal for paying your mortgage early. But you also have to make sure that your other funds are all set up.
Financial experts advise against prioritizing your mortgage payment over preparing for retirement. Ideally, you have a retirement account that was paid for or matched by your company. Other investment accounts can also help secure your future. Working at an older age isn’t the most ideal scenario, so you have to make sure that you have enough money to live a comfortable life.
Why Should You Pay Your Mortgage Early?
Now that you’ve seen what it takes, what are the benefits of paying your mortgage early on?
You Can Save Interest Payments
The longer you carry a loan, the longer you shoulder its interest. Paying off your mortgage early means you’ll save on interest expenses because you won’t be paying it for much longer. If your loan is a variable rate, you’ll also avoid the unpredictability of rates rising over the years which can increase your monthly payment.
If you can take advantage of low rates, which we currently have now, you can save yourself a decent amount of future payments. We’re talking about saving thousands of dollars in the long run.
You Can Protect Yourself from an Unstable Housing Market
Being free from monthly mortgage payments can give you a massive advantage over an unstable housing market. If the Great Recession happens again, the value of homes is likely to sink. If your home has been paid off (or nearly paid off) and its value goes down, it won’t matter because you’ll still have plenty of equity.
Whereas, if you have very little equity, you could find yourself owing more than your home is worth. It would be difficult to maximize the return from your property because its value has probably decreased. You’ll have to wait for the market to stabilize for you to sell your home without much loss. If your mortgage has been paid off, you’ll always have a safe place to call home no matter how the market behaves.
You Can Have the Freedom to Pursue Other Ventures
If you lucked out and things go according to plan, you’ll have plenty of money to spare for leisure activities. The extra money you have can be put towards things that weren’t your priority in the first place. Maybe it’s your dream to travel the world or relocate somewhere different than your hometown. It would be amazing to do these nice things because you made smart financial decisions.
Maybe it’s also your desire to have your own business. May it be a local coffee shop, a small bookstore, or your own clothing line. Your extra cash could sustain your dreams. You can allocate a chunk of your savings to help you start off a business you like. The earnings of that business can even help you out throughout your retirement.
Having no monthly mortgage payments gives you the flexibility to put your money into other investments. You can let your money grow in different investment accounts. You have a larger cash flow, so the possibilities are endless. You have every opportunity to make your hard-earned money grow so you can enjoy it in the future. The payments you skipped on can very well be spent on these other ventures.
No matter what you decide, it’s important to keep in mind that this is a big decision. You have to figure out what works best for your situation and what can help you achieve your short and long-term financial goals. Just make sure you get an expert opinion before making up your mind. You have to do what feels good and feels right.