Maybe you saved up money over the past few years, received a great promotion with a hefty raise, or came into some extra money through inheritance—whatever the reason, you now believe you have the financial means to pay off your mortgage early.
It can be tempting to rush to pay off your home loan when you have the ability to, especially if you’ve struggled with debt management in the past. And why wouldn’t you want to pay off your mortgage? Getting rid of debt could potentially free up cash flow. But while one day eliminating mortgage payments may sound enticing, there are other factors to consider when evaluating if you should pay off your mortgage loan early.
When it comes to your mortgage loan, it all depends on your unique financial situation—there is no one right answer. In this article, we’ll cover when it could make sense to pay off your mortgage early, ways to pay off your mortgage early, and ways to potentially pay off your mortgage faster.
Why You May Not Want to Pay Your Mortgage Off Early
Here are a few reasons why many consider NOT paying their mortgage off early:
• You have a reasonable interest rate on your mortgage loan. Unless you’ve reached all of your financial goals, then it may not make the most sense to pay off your mortgage early when you have a competitive interest rate. For example, if you are saving up to send your child to college, or you’re trying to rebuild your emergency fund after paying to fix a leaky roof, those might take priority. Do some research and find out what the current mortgage interest rates are like—if your mortgage rate is significantly lower than the current averages, it might be worth hanging on to.
• Paying off your mortgage loan early might deplete your liquid cash savings, potentially making it more challenging to handle unforeseen financial emergencies.
• Depending on your mortgage lender and loan terms, you might incur a penalty for prepayment. Make sure to review your mortgage terms closely.
• You’ll miss out on your mortgage tax deduction. The number of homeowners who benefit from this deduction may go down over the next six years (until the new tax law is scheduled to wrap up in 2025). But nonetheless, it is always worth discussing your mortgage tax deduction with your accountant or other tax professional before you resolve to pay your mortgage off early.
Scenarios When You May Want to Consider Paying Off a Mortgage Early
For some people, paying off a mortgage early is not ideal. But there are some situations when paying it off early might make more sense than waiting.
You’ve Met All of Your Financial Goals
If your emergency savings account is right where you feel it needs to be, and you’re diligently contributing to your retirement accounts, you may be feeling like all of your financial boxes are checked right now. If you’ve met all your other financial goals for the present, then you may be in the clear to prepay your mortgage.
You’re Interested in Being 100% Debt-Free
Sometimes just the idea of having loan payments can be mentally taxing, even if you’re in a good place financially. Money is not just about numbers for many, it’s also about emotions. So if paying off your mortgage loan early gives you peace of mind, because it’s helping you become debt-free, then that might be something to consider.
Of course, reflecting on why you want to become debt-free is important when thinking about paying your mortgage off in full. For example, if it’s because you’re approaching retirement and will no longer be getting a steady paycheck soon, it might make sense to pay off your mortgage.
Paying Off Your Mortgage Early
Let’s say that you’ve decided to prepay your mortgage because it’s the right financial move for you. How do you do it? You could pay it off in one lump sum if you have that kind of cash lying around, but not everyone can do that.
Instead, you could potentially pay more toward your mortgage each month, whether because you got a raise at work, or because you’ve trimmed some fat in your budget that allows you to pay more toward your mortgage. If you make higher payments to your mortgage each month, it could ultimately lead to paying off your mortgage faster than if you were just to make the minimum payment each month.
One Way to Pay Off Your Mortgage Faster
There is one more way you may be able to pay off your mortgage faster: refinancing.
Refinancing your mortgage is when you use a new home loan to pay for an existing home loan. It may make sense to refinance if you are going to get a significantly lower interest rate on your new, refinanced mortgage loan.
In addition to a lower interest rate, refinancing your mortgage also means you may be able to change your loan term. If you shorten your loan term, it may increase your monthly payments, but in turn, allow you to pay your mortgage off faster.
No two financial situations are the same. What’s right for your next door neighbors may not be right for you. So when you’re trying to decide whether to refinance your mortgage, consider all the options, your lender’s terms, and the new terms you would get if you were to refinance. Then make an educated decision based off your financial picture—and never hesitate to talk to a licensed professional.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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