When Is the Best Time To Pay Off Your Mortgage Early?
We can’t deny that purchasing a home is one of the most exciting milestones in life, but the thought of a 30-year loan hanging over your head may be unsettling. So naturally, most people want to pay this loan off as soon as possible. But when is the best time to pay off your mortgage early? Before using your bonus, raise, savings, or inheritance on your mortgage, you want to consider all of your options. For example, putting your money in another asset may give you a greater return than the amount of money you save on paying off your interest.
Conversely, you may not even be worried about maximizing your savings but are more concerned about having the peace of mind of not being in debt. In this blog, we’ll go over some things to consider when deciding whether or not to pay off your mortgage early. You’ll want to stay for the whole thing; we’ve got some pro tips and a free tool for you at the end!
Are There Prepayment Penalties?
One of the ways mortgage lenders makes money is by charging you interest on your loan. When you pay off your loan early, you’re essentially taking away some of their profit. To make up for this lost income, some lenders will charge a prepayment penalty. The penalty is sometimes equal to a percentage of the loan amount or a certain number of monthly interest payments. If you’re paying off your mortgage far in advance, the prepayment fees can add up quickly! A penalty of 2-3% can end up costing you several thousands of dollars. If your goal is to save money by paying off your loan early, you may end up losing money due to this penalty!
Will You Suddenly Become Cash-Poor?
Let’s talk about liquidity. Your home is not considered a liquid asset because it can take months to sell and turn into cash. When you start rapidly paying off your mortgage, you may be depleting your liquidity. Putting your life savings into your mortgage can put you in a tight spot. If you suddenly need money for an emergency or are put out of work for several months, it can be challenging to come up with cash. Using your credit card or taking out a personal loan will just put you back into debt.
Instead of putting it all towards your mortgage, you may want to keep some of that extra money as an emergency fund. Focus on getting around six months’ worth of living expenses saved up before focusing on paying off your mortgage. In addition to your emergency fund, you can put your money into assets like mutual funds, U.S. Treasuries, stock, and bonds. This way, you’ll have liquid cash in addition to investments that can be easily converted when necessary.
Is Your Money Best Used Elsewhere?
While this option comes with risk, it may be worthwhile to invest your money elsewhere. The return from the stock market will likely be greater than the amount you save on your interest rate (since mortgage rates are currently at all-time lows). You could also use this money to invest in cash flow positive property, resulting in higher long-term returns. As we mentioned, this strategy does come with risks as the real estate and stock market can crash, leaving you with a loss.
How Will You Use the Money if You Don’t Pay Off Your Mortgage?
Let’s switch gears and make a case in favor of paying off your mortgage early. While it’s ideal to invest your extra cash into something that pays high returns, it isn’t always possible. It helps to take a realistic look at what you will most likely do with all this extra money sitting around. If you find it difficult to keep in your bank account and are spending it quickly, then paying off your mortgage is a way to force yourself to save money. You’ll want to look at your spending habits and determine the best use of your money.
Do You Need the Peace of Mind?
As we mentioned, debt looming over your head is never fun. If you want to fully own your home and don’t like the feeling of owing other people money, paying off your mortgage is a good idea. Even if it’s not the most financially profitable option, it can be mentally beneficial. It may come as a significant relief if retirement is coming up and you plan on living on a fixed income.
Quick Tips
If you’ve weighed the pros and cons of paying off your mortgage debt early, and you decided to go with it, we’ve got some tips for you!
- Pay Off Your High-Interest Debts First: Credit cards, personal loans, and car loans may come with higher interest rates than your mortgage. It might be best to put your money towards paying these off first, then focusing on your mortgage.
- Keep Up With Your Other Goals: You may have other financial goals, like saving for your kid’s college education or purchasing another vehicle. While it’s easy to focus only on your mortgage, you want to keep up with your other goals as well.
- Don’t Forget About Retirement: While we already discussed investing, don’t forget about tax-advantaged retirement funds like a Roth IRA or 401(k). Having a great retirement fund on top of having your house paid off will make retirement a breeze.
- Change Your Payment Schedule: Switching to biweekly payments allows you to cut the rest of your loan’s lifetime in half. You’ll significantly reduce the length of your mortgage, and you’ll still be able to work towards your other financial goals.
- Refinance: Refinancing your mortgage can be another great option. Going from a 30-year to a 15-year mortgage can help you save on interest and get out of debt sooner.
If you’re considering refinancing your home, we offer a tool that will calculate your mortgage number for you. It will let you know what your strengths and weaknesses are in today’s mortgage environment. It offers insight into how lenders and financial institutions view you as a borrower. This insight can give you an advantage when looking for a broker or lender. It’s easy, it’s instant, and best of all, it’s completely free!