If you fantasize about life without a mortgage payment, you’re not alone. The dream of owning your home free and clear is certainly a common one among homeowners. Sadly, many dreams turn to dust when a sunbeam hits them. Should paying off your mortgage be considered equally whimsical, or could this wish be made of stronger stuff? Should you pay off your mortgage early?
Should You Pay Off Your Mortgage Early?
Some people insist that paying off your mortgage is a no-brainer. Others argue that there’s no reason to rush. Should you pay off your mortgage early? Exploring the reasons behind the diverse opinions can help you decide. Of course, if you do decide to pay off your mortgage early, you’ll want to know about important missteps to avoid and suggestions for how to do it.
Paying Early vs. Paying on Time
When you’re weighing your options, it helps to hear both the pros and cons. Money Under 30 offers insights regarding three options for homeowners who are tempted to pay off their mortgage early:
- Paying your mortgage off early. Paying early has some real positives. It comes with a huge psychological advantage. How much easier would you sleep if you never had to worry about making another mortgage payment? However, that benefit could come with a financial cost. Using the money to pay off your mortgage might mean that you miss out on other investments that would provide a higher return.
- Paying your mortgage off on time. Making slow and steady mortgage payments has its advantages. You can generally claim the mortgage interest on your taxes. You can also take the money you might have used to pay it off early and invest it, generating higher returns with safer strategies so that you can have a comfortable retirement. If you wait until your house is paid off, you’ll have less time. This could force you to take greater risks in hopes of getting the same returns you would have if you’d invested earlier. It is also worth considering that having investments in both stocks and your home gives you more variety in case of trouble. If disaster strikes, having both means that you have the option of selling some of the stocks to recover your financial footing.
- Refinancing. Refinancing can be a way to lower your monthly payment. Then, you can take the extra money and invest it or use it to pay off your mortgage early.
Mistakes to Avoid When You’re Paying Your Mortgage Off Early
You’ve decided that paying your mortgage off early is the right strategy. Before you send in your payment, make sure that you aren’t going to make a costly mistake. SmartAsset suggests that you take these steps to avoid a potentially expensive error:
- Check for a prepayment penalty. Some loans come with a prepayment penalty that can take a significant bite out of any savings that you might get for paying off your loan early. If yours does, you might be better off sticking to the planned schedule.
- Put payments toward principal. If you decide to pay off your home loan early, always indicate that any extra payments should be put toward the principal balance.
- Build an emergency fund first. Putting every penny toward your mortgage may feel satisfying. However, living on your credit cards during a crisis could do immense harm to your financial well-being. Build an emergency fund. Then, concentrate on paying off your mortgage.
- Don’t extend the loan term during a refinance. Extending the length of your loan when you refinance may lower your monthly payment, but it often increases the overall cost of your loan by adding more interest.
How to Pay Off Your Mortgage Early
How do you pay off your mortgage early? Forbes mentions four different strategies:
- Pay extra each month. Putting a few extra dollars towards the principal every month can be an effortless way to pay your home loan off early.
- Pay extra each year. Did you get an annual bonus or tax refund? Putting it toward your principal each year will chip away at what you owe.
- Refinance your mortgage. Refinancing to secure a lower interest rate or shorter term can save you money, which can help you pay down your loan faster.
- Recast your mortgage. Mortgage recasting lets you make a sizable principal payment and enjoy the benefit of a lower monthly payment without the need to refinance.