The thought of paying off your mortgage early is an exciting one as you will no longer have to pay interest on your home. But both the pros and cons of paying off your mortgage early should be considered before you actually do so if you have the means.
In some cases paying off a home mortgage before the mortgage term is up could present some disadvantages. Here are some downsides to paying off a mortgage early as well as some benefits to making this financial move.
The downside to early mortgage payoff
The extra money might be better used for investments that could make you money.
There are very few people in the world that have more money than they know what to do with, that being said what you choose to do with the amount of money you have is important. Putting some extra money into your mortgage payments above the minimum required amount can be a good decision, but it could also mean that you are missing out on other investment opportunities that could be making you a bigger profit. Some other beneficial investments you could use this money for could include investing in a retirement plan, building up an emergency fund, investing in the stock market, or investing in other areas that could bring a higher and quicker rate of investment return on your money.
There is a low rate of return
With point number one being said it is good to acknowledge the low rate of return on the extra money that you would be putting into your mortgage loan. When you repay any amount ahead of the schedule the return you get is in the interest that you will save from not making extra payments drawn out over a longer period of time. Mortgage rates are typically very low as compared to other payment rates where debt is concerned. Especially in recent months where mortgage loan interest rates are 3% or less. This clearly means that paying off a mortgage early to save on interest gives you a low rate of return on your investment. If you compare this to the average return on an S & P 500 index fund which gives 10% return annually you could be making much more money elsewhere.
The possibility of losing mortgage interest tax deduction
If you itemize things on your tax return you likely deduct the interest you’re paying on your mortgage which is a significant write-off. This means your interest payments don’t reduce your taxable income by as much and the government subsidizes some of them. If you pay off your mortgage ahead of schedule then you’ll lose this deduction on your income tax bill and it could go up.
The two big benefits of paying off a mortgage early
You save money on interest
“The biggest perk to paying off a mortgage before the entire mortgage term is that you will accrue less interest and pay less money for your home. By cutting off the time period in which you pay back the amount of money you borrowed the less interest you will have to pay over the purchase price of the home. The sooner you pay off your home the less it will actually cost.” Ocean City Realtor Deeley Chester
There is freedom in being debt-free
Once your mortgage is completely paid off you’ll have one less monthly bill to contend with. This money can be used for other things that you enjoy or need in your life. It gives you the flexibility to pay for items you were interested in like a vacation or you could decide to work less hours as you will no longer need to make as much money to pay off bills.
Should you pay off your mortgage early or make extra payments towards your loan? The answer is it depends on what you would prefer. Some people would like to get to debt-free status more quickly while others are content to continue to make a minimum payment and direct the extra money to investments with a higher return.
For more information on your mortgages in Mission Viejo and California please contact me any time.
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