Is it a Good Idea to Pay Off Your Mortgage Early?

Feb 15, 2022 | All Posts, Blog | 0 comments

Is it a good idea to pay off your mortgage early? There are certainly benefits to doing so. Can you imagine the freedom of being able to say that you truly own your house? How about being released from that monthly payment? What could you do with that amount of extra money each month? Where could you invest it?

However, there are also a number of reasons why it may not be the best idea for you to pay off your mortgage early. It’s important for each person or family to weigh the pros and cons for their unique situation.

How much could you save by paying off your mortgage early?

Paying off your mortgage early could save you tons of money on interest in the long run. For example, let’s say you take out a 30-year mortgage for $200,000 with an interest rate of 3.25%. If you make only the necessary payments for 30 years, you’ll end up paying a total of $313,348.55. This includes the total principal and interest.

Now, let’s say you decide that you want to pay the mortgage off in 20 years instead by adding to your payment each month. If you do this, you’d end up only paying a total of $272,253.60. This would save you over $41,000 over the life of the loan! Even paying off this mortgage just one year early would save you over $4,000.

If you want to see what it would take to pay off your mortgage early, check out this mortgage payoff calculator from NerdWallet.

How to pay off your mortgage early

If you decide that you want to pay off your mortgage early, there are a few different options for doing this. One option is to increase your monthly payments. Another option is to make biweekly payments instead of monthly payments. This means you would pay half of your payment every two weeks. By making 26 half-payments per year, you’ll be paying the equivalent of 13 regular payments—adding an entire extra payment per year.

If you do decide to pay extra, be sure to specify that you want that amount to go toward the principal rather than it paying down interest for the next payment. Paying down the principal is what allows you to save in the long run!

What to consider before paying extra on your mortgage

Now, before you start scrounging up your extra pennies, let’s consider some reasons why it may not be the best idea to pay extra on your mortgage.

  • Prepayment penalties. Be sure to find out whether your lender charges a penalty for early payoffs. Mortgage lenders make money by charging you interest, so penalties make up for the money they lose if you pay off your principal more quickly.
  • Lack of a solid emergency fund. Don’t throw money at your mortgage unless you first have a significant emergency fund set aside. An effective emergency fund should be enough to cover your expenses for 3-6 months. In the event that you lose your job or suffer an injury, your emergency fund will prevent you from having to take on debt for your everyday expenses.
  • Better investment opportunities. Figure out whether paying your mortgage off early will give you more in the long run than investing that amount of money. If you have a low interest rate on your mortgage, there might be better investment options that will actually benefit you more in time. Keep in mind, though, that this is a personal decision. If having a mortgage payment causes you to lose sleep at night, consider paying it off quickly, even if there are better investment options out there.

What to consider before you get a mortgage

Perhaps you haven’t even committed to a mortgage yet and are still considering your options. Before purchasing a home, really give some thought to the amount of mortgage you can afford. The number one rule when house shopping is to make sure that you have a margin of safety. While it’s tempting to buy the home that’s at the top of your budget, this approach could really backfire on you in the long run.

When considering your budget, do not make a decision based on expected future earnings potential. Instead, buy something you can afford right now, even if your income declined slightly. It’s no fun losing a job, but losing your house as well as a result is a much bigger problem. Make every effort to avoid this outcome by being conservative when deciding what you can afford in a home.

Is it a good idea to pay off your mortgage early?

Yes, if you can! Paying off your mortgage early can save you tons of interest in the long run. Just remember that this decision should be made on a person-to-person basis, as everyone’s situation is unique.

Remember, two of the main ways to pay off your mortgage early are:

  • Adding extra to the principal payment each month
  • Making one or more extra payments per year

Reasons why you might not want to pay off your mortgage early:

  • Prepayment penalties
  • Lack of a solid emergency fund
  • Better investment opportunities

Need advice?

If you’re not sure whether paying off your mortgage early or investing elsewhere is best for you, we can help. At Milestone Wealth Management, we’ve helped hundreds of individuals and families determine the best ways to prepare for retirement and financial success. It can be tough to decide where to put your hard-earned money and what will benefit you and your family the most in the long run. We’ve been there—hundreds of times! Let us use our knowledge and experience to help set you up for success, too. Contact us today to schedule an appointment.

 

This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situations above are made.

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