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If you own a home, the thought of a mortgage hanging over your head for decades can be daunting for many people – and it's natural to want to pay off your mortgage as quickly as possible.<\/p>\n
But before you decide to use an inheritance, a raise, or your savings to pay off your mortgage (or even before you decide to make additional payments), it's important to take a step back and determine if it really makes financial sense for you to do so.<\/p>\n
In some cases, the amount you save in interest by paying off your mortgage early doesn't exceed what you would earn if you put the money elsewhere. On the other hand, sometimes it's not about the return on other investments, but rather peace of mind or freeing up cash flow for other opportunities.<\/p>\n
Here's what you need to know when deciding whether to pay off your mortgage early.<\/p>\n
If you are considering paying off your mortgage early, contact your mortgage lender or servicer first. Based on the terms of your loan, you might find out that you're subject to a prepayment penalty if you pay off your mortgage earlier than your payment plan allows, or that you can only make payments within certain parameters. Knowing this information in advance can help you create a repayment plan that works for you and your lender or servicer.<\/p>\n
The biggest consideration could be whether to pay off your mortgage or invest it. What if, instead of putting the money into paying off your mortgage early, you invested it elsewhere?<\/p>\n
"Unfortunately, the math tells us that it's almost always better to invest elsewhere than in your mortgage," says Richard Bowen, CPA and owner of Bowen Accounting in Bakersfield, Calif.<\/p>\n
Mortgage rates are at an all-time low. So if paying off the mortgage early results in a return equal to the interest rate, that return would likely be lackluster compared to the annualized return for the S&P 500 – about 10 percent over the last 90 years.<\/p>\n
A potentially better use of the funds could be to invest the money you would use to pay off your mortgage in buying a cash-flow-positive property such as multifamily or single-family homes, which have the potential to offer higher returns over the long term, Bowen says.<\/p>\n
However, every choice is a risk. Even if you pay off your mortgage early, home prices can plummet, leaving you with a potential loss. Carefully consider the risks you are willing to take. Ultimately, you may be better off not paying off your mortgage early.<\/p>\n
"The thing is, no one can give you a guarantee on an investment," cautions Bowen. "You can put your money in the stock market and lose it. You can put your money into real estate and it doesn't perform as well as you anticipated."<\/p>\n
Before you take a large chunk of your assets and use them to pay off your mortgage early, don't forget to look at liquidity. Your home is considered a non-liquid asset because it can take months – or longer – to sell the property and access the principal.<\/p>\n
"If you start paying off your mortgage too quickly, you risk depleting your liquidity," says Amanda Thomas, client advisor at Mission Wealth in Santa Barbara, Calif. "The type of liquidity you have is also important. You should not invest too much money in pension funds, because fees may be incurred in the event of early withdrawal."<\/p>\n
One approach is to keep an emergency fund and assets such as stocks, mutual funds, U.S. government bonds, notes and marketable securities ready in a taxable investment account. This way, in addition to the money tied up in tax-deferred retirement accounts and your home, you still have some liquid cash or other investments that can easily be converted to cash in an emergency.<\/p>\n
Bowen suggests maintaining a cushion that protects you for at least six months before considering using a large portion of your cash to pay off your mortgage early.<\/p>\n
Be realistic about what you'll do with your money if you don't use it to pay off your mortgage early. Will you actually use it to get ahead?<\/p>\n
For example, it may make sense to put the money into paying off your mortgage early if you are having trouble keeping money in the bank. Your home can be a forced savings tool, and if you make additional mortgage payments, you can save thousands of dollars in interest over time and also build equity in your home faster.<\/p>\n
"Doing the right thing is what you're going to do," says Bowen. "All of this has to do with personal habits. If you're going to blow the extra money anyway, it's better to put it into your home than spend it."<\/p>\n
Sometimes it is less about the bottom line and more about peace of mind. Owning your home free and clear can bring benefits that can't be measured in purely financial terms. For many, eliminating a monthly mortgage payment before retirement can be a mental relief when thinking about living on a fixed income.<\/p>\n
"I personally pay off my mortgage," says Thomas of Mission Wealth. 'It feels good to have it paid off before retirement'. It may not always make financial sense, but it offers peace of mind and allows for better budgeting."<\/p>\n
Another potential benefit is the ability to borrow against the equity in your home. A substantial amount of equity can allow you to establish a home equity line of credit (HELOC), which is a source of emergency funds and allows you to make home improvements or meet other financial goals.<\/p>\n
If you decide it makes sense to pay off your mortgage early, be careful not to jeopardize your other financial goals. Here are some tips.<\/p>\n
When considering whether to pay off your mortgage early, it's important to figure out what works best for your situation and is most likely to help you meet your short- and long-term financial goals. Sometimes financial planning isn't just about making the most of the numbers. People want to feel good about where their money is going – no matter what the spreadsheet says.<\/p>\n
For some people, debt causes stress, and paying off a mortgage early can bring peace of mind. For people nearing retirement, a paid-off mortgage means they have much more free cash flow from their fixed income when they stop working.<\/p>\n
"My wife likes to have money in the bank, whereas I'd rather invest it," Bowen says. "But if money is a tool, then this money buys their happiness, so it works."<\/p>\n","protected":false},"excerpt":{"rendered":"
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