Should I Pay Off My Mortgage
Are you wondering if paying off a mortgage earlier makes sense?
Many people ask themselves, “should I pay off my mortgage?” As a homeowner, the idea of having your home paid off early is likely enticing.
Who wants to pay a mortgage every month if they don’t have to? But, as with every big financial decision, it is essential to consider all factors before you try to pay your mortgage off early.
Even though paying off the house early will save you money on interest, there are risks involved that need to be weighed against the benefits you are anticipating.
Only once you have a clear idea of the pros and cons of paying your mortgage off early can you make an informed decision.
At first glance, the idea of paying off your mortgage sooner is a clear winner. However, financial management, retirement planning, and investments, in general, require careful planning to get right.
You have to consider your financial goals, spending habits, the market, and various other factors before you can be sure of what decisions are best for you.
A Low Mortgage Rate Could Influence Your Decision
For example, if your mortgage interest rate is low, it might make more sense to hold onto your cash—or even invest it. Doing so could make even more sense if you know you’ll get a higher return rate than what you pay on your loan. ( I will get into this more later.)
That is why it is always a good idea to talk to a financial advisor before making any major financial decisions—they are trained to help you identify risks and potential rewards based on your unique circumstances.
There are solid reasons more, and more people are customizing their home mortgage loan terms. Lenders realize that offering borrowers more flexibility with the length of their mortgage is a good thing.
For example, you may want to tie the length of the end of your loan to when you are retiring.
Before you talk to an advisor, though, it never hurts to do your own research. The following information can help you understand the common benefits and drawbacks of paying off a mortgage early.
Pros of Paying Off a Mortgage Early
Here are the reasons why you may want to consider paying off your mortgage in advance.
1. A Significant Financial Burden is Removed From Your Life.
To pay off a mortgage early requires some serious financial discipline.
When asking yourself, should I pay off my mortgage, you’re probably thinking about how great it will feel to be mortgage-free. Right? Let’s face it, paying a mortgage every month is a financial responsibility that the vast majority of homeowners share.
Most people are not free and clear of their loans. For those homeowners who have high debt loads, paying the bills each month can add additional stress.
Paying off a mortgage is exceptionally liberating. You can sleep soundly at night knowing you don’t have an obligation to mortgage lenders. Even for folks who have no financial worries, it brings peace of mind to be able to say you’re mortgage-free.
Does Making Additional Payments Make Sense?
Making extra principal payments each month doesn’t always make financial sense for everyone. It is essential to distinguish whether you should be paying down your mortgage balance.
Many people consider paying off their mortgage when they are heading into their retirement years. Many people do not want to be making mortgage payments when they no longer have a steady income stream coming in.
Getting rid of the mortgage early can make a lot of sense to remove that financial burden.
2. You No Longer Have to Weigh The Cost of Your Mortgage Against Other Investments.
Investing is a balancing act that requires careful planning to avoid working against yourself. Your mortgage is probably the most significant loan you have taken out, and the cost of the interest you are paying adds up over the years and decades.
You can and should make certain investments even if you have a mortgage—like your 401K or IRA investment accounts; others are less clear. For an investment to make sense while you owe money to the mortgage company, it will need to deliver a rate of return that exceeds your mortgage interest.
Otherwise, you would be better off paying the mortgage off early. But if you have paid the mortgage off, you do not need to weigh your investments against your home loan—because you are no longer paying interest on the loan.
When money is cheap with rock bottom interest rates, the pendulum usually swings in favor of keeping a mortgage. On the flip side, if you have a high mortgage interest rate paying off your mortgage could make more sense.
Of course, if you decide keeping your mortgage makes more sense than paying it off early, you would be foolish not to refinance into a lower interest rate.
You can go for a no points, no closing costs loan, and keep the same amount of years to amortize the mortgage. You will have a lower interest rate while also paying off the loan in the originally scheduled time frame.
2. You Can Put Your Money in Less Risky Investments.
Once you pay off your mortgage, you can use the money you were paying towards your mortgage to invest in safe investments.
That’s not to say that your home is a risky investment, because it’s not. However, there is always the possibility that housing prices could drop, and your home could wind up being worth less than you expected or fail to keep up with inflation. This rarely happens, but theoretically speaking, it could.
Treasury securities and bank-insured certificates of deposits are incredibly safe investments that you could pour your money into for a very safe investment.
However, it is unlikely that these investments would deliver a higher return than your mortgage interest rate. That is why they are not as desirable for those who have mortgages.
3. You Can Invest in Higher-Risk Investments Like Stocks.
Treasury securities and bank-insured certificates of deposits are not high-yield investments, which is expected when an investment is extremely low-risk.
You can diversify your portfolio by investing in stocks, which are more likely to yield higher dividends.
Of course, there is more risk, but you can mitigate the risk by going for stock index funds.
Talk to your financial advisor about long-term investing strategies once you have paid off your mortgage so you can get advice that pertains to your unique situation and specific goals.
Over the long term, the stock market is a great place to have your money. If your investment horizon extends out several years, it makes sense to have a large chunk of your financial portfolio in stocks.
With inflation coming in at a historical level of between 2-3 percent, stocks have given investors a 7-8 percent return a year. People get into trouble when they try to time the market. Buy and hold is the way to go when you have a longer investment time frame.
4. You Free Up Cash Flow For Your Household.
Not having a mortgage payment each month will free up a lot of cash for you and your family each month. The more cash flow you have, the less stress you will experience when you are hit with the many unexpected and expected expenses that come your way.
More cash flow also gives you options for saving or investing that you would not have otherwise.
5. You Can Stop Paying PMI.
Most lenders require private mortgage insurance until you reach 20% equity in your home. The sooner you reach 20%, the sooner you can stop paying PMI and put that money to better use.
PMI offers no benefits to a homeowner. You are throwing a significant amount of money out the window every year for as long as you continue to pay private mortgage insurance.
Private mortgage insurance protects the lender from default and nothing more.
6. You Can Convert Your Equity to Cash.
The more you pay off your mortgage, the more equity you will build in your home, and the better your financial options become for leveraging that equity. Eventually, you can get a home equity line of credit, or a cash-out refinance.
You can use the cash you get from these new loan options to renovate your home, pay for emergencies, or invest in another property.
Cons of Paying a Mortgage Off Early
Here are the reasons why you may not want to pay off your mortgage in advance.
1. You Lose Liquidity Paying Off a Mortgage.
Liquidity refers to how easy it is to access and spend the money you have. When you pour all of your cash into your home, you lose liquidity.
If an emergency sprung up and you needed cash, for example, you would have to get a home equity loan or sell the home to access your money.
If you held off on paying off the mortgage and kept some of the cash in a savings account, you could get to the money immediately. It is essential to weigh your need for liquidity against your desire to be done with the mortgage.
Most people who decide to pay off their mortgage early have no worries about having extra cash.
2. You Lose Access to Tax Deductions on Interest Payments.
As of right now, you can deduct your interest payments on your mortgage each year when you file taxes, although not as much as you used to.
That means you get more money back each year because of the money you pay towards interest. Once you pay your home off, you will lose those tax deductions.
The amount of mortgage interest you can deduct, however, has recently changed for the worse.
When you own a home now, you can only claim an itemized deduction for interest on a mortgage up to $750,000 if married and $375,000 if married filing separate status. These limits are in place until 2025. Under the old tax code, the debt limits were $1,000,000 and $500,000.
Additionally, under the old tax code, you could also deduct mortgage interest up to one hundred thousand of home equity debt, or fifty thousand if married, filing separately.
Under current law, you can only deduct interest on home equity debt used to acquire or improve your residence, subject to the $750,000/$375,000 limits.
Carrying a mortgage has become less appealing under the new tax laws. There are fewer tax breaks for homeowners.
3. You Could Get a Small Knock on Your Credit Score.
One of the factors that go into your credit score is your credit mix—the different loans you have at any time. When you pay your mortgage off, it drops out of your credit mix. That could lead to a small drop in your credit score.
The credit mix you possess contributes ten percent of your overall credit score. Considering this, it should be understood that other creditors see you paying your mortgage each month as a good thing.
When they determine your viability as a borrower, it’s excellent they see you making your payments on time each month.
4. You Cannot Put The Money Towards Other Investments.
It will probably take a focused financial push on your part to pay the mortgage off early. All that money you pour into the mortgage could be put into other investments that might yield higher returns.
The average return on the S&P stock market index over the past 90 years was around 10%, whereas the rate on a standard mortgage for 30 years is about 4.5%.
Few would advise you to dump all your money into stocks instead of your mortgage—stocks carry much more risk—but it is worth remembering that you could earn more from stocks.
If you have credit cards with high balances it might also make sense to pay them down first. In the long run, you may save more money with their higher interest rates.
In the same vein paying off student loans first could be more beneficial.
5. You Might Not Be Able to Put as Much Away into a Retirement Account
With extra money going towards paying down a home loan, you might not be able to max out your retirement accounts. Your retirement plan will not grow as quickly without maximum funding.
It is an opportunity cost that will need to be weighed carefully.
Paying off a Mortgage Early Calculator
Using a mortgage payoff calculator can help you determine several options for paying off a mortgage early. For example, you can use the mortgage payoff calculator for analyzing making biweekly payments, one-time extra payments, or periodic extra payments.
A calculator for paying off a mortgage early will figure out the remaining time to pay off a mortgage, differences in payoff time, and how much interest you’ll save with the payoff options.
Perhaps you would like to pay off a mortgage earlier for some specific timeline or reason.
You can use a calculator to determine when it is best to pay off a mortgage early for your circumstances. The mortgage payoff calculator will be able to figure out exactly how much mortgage interest will be saved based on the input data.
How to Pay Off a Mortgage Early
Let’s look at the ways to pay off a mortgage.
Make Extra Mortgage Payments
There are several ways to go about paying off a mortgage early. The most common is making extra mortgage payments. Doing so can be accomplished in two ways. You can either make an additional principal payment each month or make a lump sum payment during the year.
You have the flexibility of paying off your mortgage before it’s due based on what’s comfortable for your finances. It is essential to let your mortgage lender know any extra payments should be applied toward the principal.
Set Up Bi-Weekly Mortgage Payments
What many borrowers do not realize is that having bi-weekly mortgage payments gives you one extra mortgage payment a year.
By having a bi-weekly payment you can save a significant amount of mortgage interest. Most lenders allow you to set up bi-weekly payments.
If for some reason they don’t, you can still add what you would have paid bi-weekly into your normal monthly mortgage payment accomplishing the same thing.
Refinance Your Mortgage With Better Terms
Doing mortgage refinancing makes sense when you can get a lower mortgage rate or reduce the loan term.
For example, if you can go from a 30-year loan to a 15-year loan, you can save a ton of mortgage interest. You just need to make sure that the shorter-term mortgage does not negatively impact your household budget each month.
Refinancing into a shorter term should only be done when you’ve got a comfortable financial cushion. It will be essential to have a well-funded emergency fund.
You can use the mortgage payoff calculator above to see payment scenarios.
Make a Large Principle Payment
Making lump-sum payments is possible when money unexpectedly falls into your lap.
If you are fortunate to come into a large windfall of cash, you can put it toward a mortgage payoff. Paying off the mortgage in this fashion can happen when you get a tax refund, a large work bonus, or possibly coming into an inheritance.
See if Your Mortgage Lender Will Recast the Mortgage
Mortgage recasting occurs when you pay a lump sum towards the mortgage principal and the lender adjusts the amortization schedule to reflect the new balance.
The recasting will provide lower monthly mortgage payments but your interest rate and loan term don’t change. The benefit of recasting is it doesn’t cost nearly as much as refinancing. Mortgage fees for recasting are usually only a few hundred dollars.
You’ll need to confirm with your lender a mortgage recast is an option.
Confirm There are No Prepayment Penalties
Mortgage lenders today rarely have a prepayment penalty but it is vital to check nonetheless. An extra monthly payment is commonplace with those looking to lower mortgage debt.
Paying off a home loan quicker should never be a problem.
What Happens When You Pay Off Your Mortgage?
You may be wondering what will happen when a mortgage is paid off. Your lender will provide you with a few documents when your loan has been paid off.
The documents are referred to as a mortgage release or mortgage satisfaction. You’ll be mailed a letter from the lender stating your mortgage has been paid in full. You will also receive a canceled promissory note which was signed when you purchased your home.
When you pay off a mortgage it should be recorded at the local registry of deeds. It may take a few months for this to happen. It’s essential to follow up and make sure this step is completed by your lender.
Frequently Asked Questions on Paying Off a Mortgage
1. What is the average age to pay off a mortgage?
Many experts that recommend having your mortgage paid off say it should be done by the time you hit fifty years of age.
2. What is the most significant downside of paying off your mortgage early?
The biggest drawback of paying off a mortgage is reducing your liquidity. It is far easier to get money out of an investment or bank account than it is to get money from the equity you’ve built in your home.
3. What effect will paying $100 a month have on paying off my mortgage?
If you add just one hundred dollars towards the mortgage principal each month, it will significantly impact the life of the loan.
You can expect that paying $100 extra will cut the life of your loan by five to six years.
4. Do extra payments automatically go toward the principal?
No. It would be best if you let the lender know the extra funds should be applied to the principal balance.
Some lenders will apply the money to the interest first, which you do not want. It is rare but you should also ensure there is no pre-payment penalty.
5. What happens when you pay off your mortgage early?
When you have paid off your mortgage, you can expect the lender to send you your original promissory note with the words paid in full. There should be an explanation that you have paid off your debt in full.
6. Will paying off my mortgage impact the amount of income taxes I pay?
Yes. When you pay off your mortgage, you will no longer be afforded a tax deduction. This is one of the arguments for not paying off your loan early.
For example, if you have been writing off $5000 of loan interest a year and you pay a 25% federal tax, the tax liability would rise by $1250 when you no longer have this deduction.
7. What’s the best way to pay off your mortgage?
You can pay off your mortgage faster by doing one of two things. Either make one or more additional mortgage payments a year or put an additional amount of money each month to go towards paying off the balance quicker.
Another option as discussed is to pay your mortgage bi-weekly, which will, in essence, be providing the lender with more payments each year.
8. Is it better to get a 15-year mortgage or pay extra on a 30-year mortgage?
The answer really depends on what you can afford to pay each month. A 15-year mortgage will come with a lower interest rate, so if you have no issue making a higher payment each month, this would be the route to take.
On the other hand, if you are not sure your income will remain steady or you’ll take on more debt, having the flexibility to choose the amount to pay would be better.
9. What are the fastest ways to pay off a mortgage early?
The quickest ways to pay down a mortgage are either setting up bi-weekly mortgage payments, sending the lender more each month, giving the lender extra payments, or selecting a smaller loan term.
Of course, you could do a combination of any of the above to make the payoff happen even sooner.
10. Does paying off your mortgage hurt your credit scores?
Paying off your mortgage will have a negligible effect on your credit scores. They may drop slightly but not enough to worry about.
11. Do millionaires pay off their mortgages?
Yes. Most millionaires are mortgage-free. The average millionaire will pay off their mortgage in eleven years. Over 65 percent live in homes mortgage-free.
Final Thoughts on Whether to Pay Off a House Mortgage Early.
Whether or not it makes sense to pay off your mortgage early really boils down to each individual’s financial and life circumstances. What may be right for one party may not make sense for another.
Your financial situation should dictate whether to pay off a mortgage earlier makes sense.
Do your research and possibly reach out to a financial advisor who can study your circumstances more closely. The advantages and disadvantages of paying off a mortgage sooner are not always clear, cut, and dry.
Hopefully, you now have a better understanding of whether you should pay off the mortgage.
Other Mortgage Resources Worth Reading
Would you like more helpful mortgage guidance? Take a look at some of the excellent resources found on Maximum Real Estate Exposure before buying a home.
- Why do home mortgages get transferred – have you ever wondered why you start with one lender and end up with another? Mortgages getting sold is a common practice in the lending industry. See what you need to know about this financial practice.
- What questions should I be asking lenders – when you are purchasing a home with a mortgage, the lender’s questions are vital to making smart financial decisions. See what information you should be getting from the lender you ultimately choose.
- How to pick a lender – one of the most important aspects of purchasing a home is choosing a mortgage lender. See some of the most vital factors in making the right lender choice.
- How do you get the lowest mortgage interest rate – a significant financial factor for many years to come when purchasing a home will be your interest rate. See how you can get the most attractive financing.
- Mortgage myths – are you aware that there are many mortgage falsehoods and half-truths? See some of the most common mortgage myths and make sure you avoid them.
- What are the best mortgage programs for first-time buyers – did you know specific mortgage programs work well for first-time home buyers? Take a look at the detailed review of first-time home buyer mortgage programs.
Become educated on the process of financing a home with each of these mortgage-related articles.
About the author: The above Real Estate information on paying off a mortgage early was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at firstname.lastname@example.org or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 36+ years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
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