The thought of being debt-free from paying off a mortgage early would put a smile on the faces of many homeowners. As the uncertain future of the housing market continues, along with a slowly growing economy, homeowners are doing what they can in search of debt relief, but there are many important factors that should be considered first if you are thinking about you paying off your mortgage early.
Plenty of potential for savings
Once the mortgage is paid off, you will have more money in your pocket each month to invest or pay off other debts. When you pay your mortgage faster than the scheduled monthly payments, your principal decreases faster, reducing the amount of interest you pay the bank over the life of the loan. When the mortgage is paid off, you also benefit from not having to pay private mortgage insurance (PMI).
Additional advantages include having stability in an uncertain market. When you own your home free and clear, you are not at risk of foreclosure if your financial situation changes. Your credit score will probably also improve when your mortgage is paid off, since it reduces your total debt.
Ways to beat mortgage debt
There are a variety of ways you can pay down your mortgage, or pay it off early. Some mortgage lenders will charge a fee if you pay more than the monthly payment, so before you choose one of the following methods for paying your mortgage off faster, you want to make sure there are no prepayment penalties.
Here are several popular approaches:
- Add a little extra to your payment each month, whether it’s $15 or $45. When you send a few dollars extra each month, include a note that you would like the extra money to apply toward the principle balance and over time, these extra payments will help you shave years off your mortgage term.
- Every 3 months, make an extra month’s payment. Another option is to make payments every 2 weeks, instead of a once per month payment. You will end up making 27 half-payments, instead of 12 regularly scheduled payments.
- If you receive a tax refund, use the funds to make an extra payment at the beginning of the year, and include a note that you want the money applied to the principle balance.
- After an investment product like a certificate of deposit has matured, consider applying the principle, the interest, or both toward your mortgage.
- If you are lucky enough to work someplace where you receive a holiday bonus, or bonuses for a job well done — use those bonuses to make an extra payment on your mortgage.
- Any extra cash that you win or inherit can be applied to the balance of your mortgage. You aren’t counting on this kind of income for your debts or as spending money, so you may as well commit in advance to put any windfall and unexpected money toward paying your mortgage off early.
The advantages of ridding yourself of a monthly mortgage payment sound tempting, but there can be drawbacks to the mortgage-free life. For example, if you are using your liquid assets to pay off your mortgage early, you may not have the emergency fund or savings to cover sudden expenses in the future. Your mortgage may be paid sooner than expected, but if it costs you the ability to pay for unexpected problems later, you could end up in debt again.
When you focus solely on paying off your mortgage, you might actually accumulate higher interest debts on credit cards or other loans. The balance of your mortgage is going down and that can feel great, but is it worth it if you’re carrying tens of thousands of dollars in other, higher-interest debts?
Another consideration that might prevent people from paying their mortgage off early is the loss of the mortgage interest tax deduction. The closer you get to paying off your mortgage, the less you pay toward interest and the less your tax deduction will be.