Should I Pay Off My Mortgage Early?
If you’re a homeowner and you’ve come into some extra money, you’re probably tempted to put it towards your mortgage. While there are benefits to paying off your home early, there may be better, more lucrative options when it comes to investing your money. Weigh the pros and cons of paying off your mortgage early to see if it’s the right choice for you.
What to Consider Before Paying Off Your Mortgage
Use these questions to help you decide between paying off your house and investing elsewhere.
Could You Make More Money by Investing?
Paying off your home can help you save on interest payments. However, investing your money early could make up for the cost of interest with some leftovers. Investing now is like investing in the future—your monetary contributions grow and accrue interest the longer they sit.
If the current stock market interest rate is higher than the mortgage interest rate, investing your money for ten years would yield greater results than paying off your mortgage ten years early. However, the stock market and other investments aren’t fully guaranteed to pay off. If you don’t get the return you’re expecting, you may regret taking the risk. It all comes down to personal preference!
How Will You Use Your Extra Money?
Paying off your mortgage early will put more money in your monthly budget. If you trust yourself to use the extra money wisely, then paying off your mortgage and investing your new monthly cashflow may be a wise decision. However, if you’re an impulsive spender, making monthly payments might be a better way to keep yourself accountable.
Do You Have Any Other Outstanding Debts?
Experts recommend paying off your high-interest loans before your low-interest ones. If you have leftover student or credit card debt, you may want to put those to rest (and put an end to those reminder emails!) before your mortgage. Just don’t overspend in one area and risk losing your home by defaulting on your mortgage.
Will All Your Cash Go Towards Your Mortgage?
If you decide to prioritize your mortgage, don’t deplete too many of your liquid assets, or assets you can quickly exchange for cash. Your home is a non-liquid asset, as it could take months to years for it to sell. Without liquid assets, you may run into financial trouble if there’s an emergency or unprecedented event. Before paying off your mortgage, experts recommend creating and maintaining an emergency fund with assets, such as stocks, bonds, and more, that you can liquidate when you’re in a bind.
Does Paying Off Your Mortgage Early Fit into Your Retirement Plan?
If you plan on staying in your current home after you retire, you may want to pay it off now instead of post-retirement. However, if retirement feels far away and you don’t have many assets, consider investing instead.
The Pros of Paying Off Your Mortgage Early
There are multiple benefits to paying off your mortgage early, including:
Saving money on interest
Freeing up monthly cashflow that you can use to invest elsewhere
Owning your home outright and the peace of mind that comes with it
The ability to tap the equity in your home if needed
A predictable return, unlike the stock market and other investments
The Cons of Paying Off Your Mortgage Early
While it has its benefits, putting a large portion of your money towards your mortgage has some downsides:
Limiting your investment opportunities
Losing your federal mortgage interest tax deduction—a deduction on your taxable income for your mortgage interest
Tying a large amount of cash into your home and lowering your liquidity
Paying mortgage prepayment penalties (if applicable)
A potentially lower credit score because of dropping one type of credit
Now that you know the pros and cons of paying off your mortgage early, you’re ready to explore your options and decide where to put your funds. Get more financial tips and budgeting advice by visiting The General’s blog. If you’re in the market for affordable car insurance, you’ve come to the right place. For over 60 years, The General has offered amazing rates, five-star customer service, flexible payment options and more to our customers. Get a free insurance quote in under two minutes and start saving.
