Is paying off your mortgage early always the best financial decision?
Are you thinking about paying off your mortgage to get out of debt or boost your monthly disposable income? Making extra mortgage payments isn’t your only option to improve your finances. (iStock)
When comparing mortgage options, many home buyers look at upfront closing costs and monthly payments to determine if they have the right cash flow to afford their dream piece of real estate. After settling on the right mortgage lender and home loan, seeing the predicted loan term costs spelled out through a mortgage calculator may inspire some homeowners to prioritize putting extra money toward paying off their mortgage early.
The sooner you eliminate mortgage payments from your monthly budget, the easier it is to fully achieve other financial goals. And with today's low mortgage rates, millions of homeowners have already made the financial decision to refinance their mortgage to lower their monthly payments or speed up their mortgage payoff. (You can get a quick snapshot of refinance rates you qualify for by visiting a mortgage lender marketplace like Credible).
While paying off your mortgage may be a good idea, there are still personal finance pros and cons to consider.
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Why should you payoff your mortgage early?
Refinancing your mortgage or making extra payments can be wise options to pay off your home for several reasons.
1. Reduce financial stress
Brandon Renfro, a certified financial planner in Hallsville, Texas, states, "For many, not having debt looming over them is a significant stress relief that improves their quality of life."
Refinancing your home loan can potentially save you thousands of dollars when an early mortgage payoff isn’t possible. The benefits of having lower monthly mortgage payments can help bring some peace of mind to homeowners with variable income or other high monthly bills. But remember: refinancing involves taking out a new home loan and there will likely be associated closing costs.
Credible can help you compare mortgage lenders and discover the best refinance rates available today so you can lower your monthly payments and meet your financial goals. You can also use their free mortgage calculator to get a sense of how much you could potentially save.
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2. Reduce total interest payments
Paying off your mortgage early and targeting your principal balance can reduce how much you're paying toward your home loan's interest and save you thousands of dollars.
A Realtor.com report found that the national median listing price is $340,000. The total interest charges are approximately $140,000 with a 30-year mortgage or $66,000 with a 15-year mortgage.
Visit a multi-lender marketplace like Credible to see if you can also save money through a mortgage refinance. You can get prequalified rates without impacting your credit score.
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3. Retirees want financial freedom
Older homeowners nearing retirement can benefit from an early mortgage payoff. Renfro observes that eliminating the mortgage payment is a common financial goal for those who don't want to use up too much of the money they've saved for retirement.
"Being debt-free gives a lot of flexibility and financial freedom to retirees, which is a priority for most in this stage of life," Renfro mentions.
When relying on a fixed income, reducing total monthly expenses can add more years to a retirement fund.
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Why you should not pay off your mortgage early?
It’s better for some households to continue making the minimum payment amounts on their mortgage and other low-interest debt.
1. Have high-interest debt
Many households have multiple types of debt. A mortgage is likely to have the lowest interest rate despite the high monthly payments.
Depending on your financial situation, it may be better to prioritize paying off high-interest debt, like from credit cards, or other lines of credit, like an auto loan, to give you more financial flexibility faster.
If you are struggling with high-interest credit card debt, a debt consolidation loan could help lower how much you're paying in interest. If you would like to get a sense of what debt consolidation loan options are available to you, visit Credible to compare rates and lenders.
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2. Investment returns can be higher
For some homeowners who could make extra payments, putting that extra money toward long-term investment vehicles may be more financially enticing. For example, the historical annual return of the S&P 500 is approximately 7% and the 30-year mortgage rate is approximately 3% APR for well-qualified buyers.
As today’s mortgage rates are near historical lows, making extra mortgage payments doesn’t have the same appeal when mortgage rates are similar to expected investment returns.
However, Renfro reminds homeowners there is some degree of uncertainty for the future performance of investments. He recommends that investors don’t solely compare loan rates with a presumed investment rate of return.
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3. Other financial goals take priority
A mortgage payment can be annoying, but it’s important to also focus on other financial goals.
Some examples include building up an emergency fund, saving for a large purchase and making home improvements to boost your home's value. Life experiences like going on vacation and starting a family may also be important to you.
If you want to start an emergency fund, consider opening a high-yield savings accounts. You can learn how you can save extra cash and check out high-yield savings options via the Credible marketplace.
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Summary
Paying off your mortgage early is an effective way to get out of debt and reduce financial stress. But pursuing early payment options may not be worth it if you can earn more money by investing or want to save for upcoming expenses and life events.
Have mortgage questions or unsure if you should refinance your mortgage? Visit Credible to get in touch with experienced loan officers.
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