Considering paying off your mortgage early? Good work; you’d be joining the almost 30 percent of Americans who own their home free and clear. But is paying off your mortgage early the right decision for you? To help you decide, we’ve laid out the facts, from the good, to the bad, to the ugly.
First off, there are many benefits of paying off your mortgage early. If you pay your home off before you retire, it’s one less expense you’ll have to worry about when you’re living on a fixed income. You can use the money that would’ve otherwise gone toward your mortgage on other things, like building up your savings or investing. Plus, who doesn’t dream of living debt-free?
There are several ways to pay off your mortgage faster, including:
- Biweekly payments: Instead of paying just once a month, you can make half payments every two weeks. Why? A biweekly payment schedule will get you 13 full mortgage payments in a year instead of your usual 12.
- Refinance: If you refinance into a loan with a shorter term (say, 15 years instead of 30), you’ll be able to pay off your mortgage that much faster. Bonus: Shorter-term loan typically means lower interest rates, so your payments may not be as much as you expect (i.e., not double the amount you pay monthly on a 30-year loan).
- Pay extra toward your principal: This is probably the most obvious option, but you’ll want to be sure any extra money you pay is actually going toward your principal, not just your interest. Many lenders allow you to make an extra payment and mark it as “principal only.”
Now come the drawbacks when it comes to paying off your mortgage early. One of these is: Could that money be used elsewhere? Historically, the return on stocks has been somewhere around 10 percent. If the interest on your mortgage is 4 percent, does it really make sense to lose out on the money you could potentially be investing in your retirement? Of course, returns on investments can vary, and there’s no way you can predict with certainty what the stock market will do. But it’s something to keep in mind.
Another thing to consider: It’ll be a long-term game to pay off your mortgage early. You’ll likely have at least 10 years of increased monthly payments in order to make owning your home outright a reality. In addition, once you get that paid off, you’ll no longer be able to deduct mortgage interest on your taxes.
Now, for the ugly. What happens if you need money, and fast? Real estate is often considered safer than stocks, but if the worst happens and you need a significant amount of cash, stocks are much easier to access. The alternative could mean selling your home or taking out a home equity loan (which puts you right back where you started). And if you happen to become unemployed, taking out a loan against your home could be extremely difficult.
Also, take into account other debts you may have. If you have higher-interest debt, or your savings account is looking slim, you may want to consider tackling those issues before you start worrying about paying down your mortgage. You could pay it off in 15 years, of course — or you could use those 15 years to be saving and investing. It’s best to explore your options carefully before making a decision.
Protecting Your World
There’s more good news: You don’t have to navigate tough decisions on your own! Whether you’re just starting out, buying a new home, or looking into retiring, your local Farm Bureau agent will be there to help you realize your goals.