Few People Regret Paying Off Debt
There are huge psychological benefits to a debt-free life.
Even with a relatively low interest rate on your mortgage , paying it off provides a guaranteed return, plus the elimination of your monthly mortgage payment. No matter what the historic track record of the stock market is, there is no guarantee that your portfolio will perform at that level over the next 10 or 20 years. How much better would you sleep with no mortgage payment?
As much as we might think of financial decisions as being a numbers game, they do come with the potential for both psychological and emotional problems. If you dont think that you could stomach losing a bunch of money on your stock portfolio while you still owe a fortune on your house, youre almost certainly better off focusing on paying off your mortgage.
If being debt free is more important to you than having a large investment portfolio, concentrating your efforts on paying off your mortgage is the better course.
Reasons To Consider Paying Off A Mortgage Early:
Youre close to retirement.
If youre approaching retirement and still staring down a mortgage, it might be time to think a little more about the situation. Retirees living on a fixed and limited income may benefit significantly from knocking out that monthly payment, especially since investing heavily in the market may not make as much sense at this age.
You have a high interest rate on your mortgage.
In truth, a whole lot should depend on how much interest youre paying your loan. If the rate is relatively high, then you might well be better off paying it off. If its quite low, then the mortgage really does fall into the category of good debt and isnt worth the opportunity cost you incur by paying it off. Take that extra money you apparently have lying around and invest it instead.
You really hate debt.
While this really isnt a financial reason to make this decision, for some, its emotionally compelling. You may just enjoy your life more with the knowledge that the house is fully paid off.
Youre not going to save otherwise.
Financial experts do mention that if someone doesnt seem to be capable of saving or putting money away in any other fashion, making one big push to pay off the house can be a safe way to ensure a degree of financial security. However, this situation isnt all that common.
You want to leave your house to someone who needs it.
Check For A Prepayment Penalty
Most mortgages today don’t come with a prepayment penalty, so if you signed yours fairly recently, this probably isn’t an issue. However, if you have an older home loan or a jumbo mortgage, then you could be on the hook for a fee if you pay off your loan ahead of schedule. Take a look at your loan documents or contact your lender to see if you’ll be subject to a penalty or not.
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Do You Have Other Debts To Pay Off
The general rule of thumb is that you should focus on paying off higher-interest debt before lower-interest debt. You may be paying a higher rate on a credit card or private student loan than on your mortgage, so you’d benefit more by paying those off early.
Don’t pay so much toward your higher-interest debt that you risk defaulting on mortgage payments, though. Yes, , and the issuer may take legal action if you default on card payments. But defaulting on mortgage payments can be an even bigger risk, because you could lose your home.
There’s no clear right or wrong answer about whether or not you should pay off your mortgage early. It depends on your situation and your personal goals.
Are Biweekly Mortgage Payments A Good Idea
A biweekly payment plan can be a good ideabut never pay extra fees to sign up for one. Remember, theres nothing magical about them. The real reason it helps pay off your mortgage faster is because your extra payments add up to 13 monthly payments per year instead of the standard 12. So if your lender only lets you pay biweekly by charging you a fee, dont sign up.
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Should I Pay Off My Mortgage Early
If youre like most Americans, your mortgage is one of your biggest monthly expenses. Can you imagine what it would be like to not have to pay your mortgage every month?
If you were to eliminate your mortgage payment, you would be able to do more with your monthly income. Perhaps, you would have a surplus of cash you could invest or use to check items off your bucket list. However, while for some, paying off their mortgage might seem like a dream, its not always the best solution for homeowners. To identify if paying off your mortgage is the right financial move for you, here are a few things to consider.
My Best Advice: Plan For The Future
If you’re focused on paying off your mortgage, good for you. It’s generally always good to get rid of debt. Plus, with no mortgage, you get a guaranteed, risk-free return.
Just make sure you consider the downsides.
Aside from losing motivation, you also tie up capital in an illiquid asset when you pay your mortgage off early. Unless you have a very diversified net worth, having a lot of capital in the form of home equity can be a bad thing. Your home could collapse in the next storm or burn down in a fire.
And with interest rates at all-time lows, it might make more sense to refinance your mortgage into a low fixed-rate term for as long as you plan to own the property and then invest the rest.
The right answer depends on your current situation, tolerance for risk and long-term goals.
My best advice is to pay off your mortgage by the time you no longer want to work. Figure out when you plan to retire and divide your debt amount by the number of working years you have left.
There are free retirement planning calculators to help give you a realistic picture of your financial future. After all, there’s no rewind button in life. It’s always better to over-plan than it is to under-plan.
Sam Dogen worked in investment banking for 13 years before starting Financial Samurai, a personal finance website. He has been featured in Forbes, The Wall Street Journal, The Chicago Tribune and The L.A.Times. Sign up for his free weekly newsletter here.
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Paying Off Your Mortgage Early: When And How To Do It
There are a number of strategies you can follow to pay off your mortgage faster. By refinancing or making extra quarterly payments, you can shave months, or even years, off your pay-off date.
Edited byChris JenningsUpdated March 28, 2022
Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. By refinancing your mortgage, total finance charges may be higher over the life of the loan. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”
When you take out a mortgage, you might feel uneasy at the thought of carrying debt and paying high interest costs over time. Paying off your mortgage early, however, could help you save money and rid yourself of some financial stress.
Before you make extra mortgage payments or zero out the debt entirely, you should consider whether its the best move for you. It may make sense in some circumstances, but not all.
Heres what you need to know about paying off your mortgage early:
Look Into Mortgage Recasting
A mortgage recast is when a lender recalculates a new loan balance and puts forth a new payment schedule, usually after the borrower makes a large payment toward the loans principal balance.
This new payment or amortization schedule will detail principal and interest percentages in each payment due from that point until the loan is scheduled to be paid off.
Since the new loan balance is naturally lower, a mortgage recast results in lower monthly payments for the borrower.
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Refinance To A Shorter Loan
Has your income increased? If so, you may want to consider refinancing to a shorter term. Refinancing your mortgage allows you to save money on interest without worrying about penalties or scheduling extra payments. It also allows you to fully own your home much faster.
Keep in mind that refinancing your mortgage to a shorter term will increase your monthly payments. Do the math and make sure you can cover the extra financial burden before you make that move.
Consolidate debt with a cash-out refinance.
Your home equity could help you save money.
Benefits Of Paying Mortgage Off Early
Many people struggle when deciding whether to pay off their mortgage or build up savings, but in the long run, the benefits of getting free from that mortgage really shine through. For one, having one debt paid off means being able to handle any short-term debts such as credit cards. You also end up saving money if you pay off your mortgage earlier, avoiding additional interest that would have otherwise accrued. Your financial stability is bolstered by cutting out these future payments and also by your ability to better endure turbulent housing market conditions.1
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You Can Invest In Higher
Treasury securities and bank-insured certificates of deposits are not high-yield investments, which is expected when an investment is extremely low-risk.
You can diversify your portfolio by investing in stocks, which are more likely to yield higher dividends.
Of course, there is more risk, but you can mitigate the risk by going for stock index funds.
Talk to your financial advisor about long-term investing strategies once you have paid off your mortgage so you can get advice that pertains to your unique situation and specific goals.
Over the long term, the stock market is a great place to have your money. If your investment horizon extends out several years, it makes sense to have a large chunk of your financial portfolio in stocks.
With inflation coming in at a historical level of between 2-3 percent, stocks have given investors a 7-8 percent return a year. People get into trouble when they try to time the market. Buy and hold is the way to go when you have a longer investment time frame.
Paying Off Early Means Increased Sequence Of Return Risk
Paying off your mortgage early means foregoing adding more to your investment portfolio today. The effect is that most of your investments are compressed into a smaller time frame — post-mortgage payoff — which increases your exposure to sequence of return risk.
Sequence of return risk is the potential for a few years in the stock market to have an outsized impact on your investment portfolio. If the stock market has a few bad years in a row when you have most of your money invested, the impact is significant. Likewise, if the market goes on a tear for a few years and you have practically nothing invested, you’ll have missed out on a significant portion of returns the market provides.
Since stocks are more volatile than other assets, the real benefit of the asset class — greater expected returns — is often seen over long periods of time. But if your investment horizon is shorter, you could face several years of poor returns at the most inopportune time. That risk is mitigated with more time invested in the stock market, which means spreading your investments out over as much time as possible.
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Refinanceor Pretend You Did
Another way to pay off your mortgage early is to trade it in for a better loan with a lower interest rate and a shorter termlike a 15-year fixed-rate mortgage. Lets see how this would impact our earlier example. If you keep the 30-year mortgage, youll pay more than $158,000 in total interest over the life of the loan. But if you switch to a 15-year mortgage with a lower interest rate, youll save almost $100,000and youll pay off your home in half the time!
Sure, a 15-year mortgage will come with a bigger monthly payment. But if it fits within your housing budget, itll totally be worth it! And hey, maybe youve boosted your income or lowered your cost of living since you first took out your mortgagethen youd definitely be able to handle the bigger payment.
You can refinance a longer-term mortgage into a 15-year loan. Or if you already have a low interest rate, save on the closing costs of a refinance and simply pay on your 30-year mortgage like its a 15-year mortgage. What if you already have a 15-year mortgage? If you can swing it, imagine increasing your payments to pay it off in 10 years!
Make An Extra Mortgage Payment Every Year
Throw all or a portion of new-found money like a year-end bonus or inheritance at the mortgage. The earlier into the loan you do this, the more of an impact it will have. In a typical 30-year mortgage, about half the total interest you pay will accumulate in the first 10 years of your loan. That is because your interest rate is calculated against the very high principal amount you owe in the early years.
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How Much Can I Save By Paying Off My Mortgage Early
How much you can save depends on your method of overpayment, the amount you overpay and the terms of your mortgage.
For example:
If you had a remaining mortgage debt of £150,000 to be paid over 25 years at an interest rate of 5% and you decided you wanted to overpay by an extra £100 each month, you could save a total of £23,200 in interest alone. It would also mean you would have paid off the entire mortgage in just over 20 years instead of 25.
Paying a lump sum of £10,000 up front instead could still save you £22,185 in interest alone, and mean you finish paying off your mortgage in 22 years instead of 25. But if you pay a lump sum, make sure it does not go over the penalty limit for overpaying.
For example, if you still had a mortgage of £150,000 remaining, and wanted to pay £20,000 in one go, but the bank had a repayment penalty on any payments over 10% , you would be required to pay a fee on the extra £5,000.
Check what this fee might be, and calculate whether it is still worth it. If you time it correctly and do your calculations in advance, you can continue to overpay without incurring any early repayment penalties.
Should You Invest Instead Of Paying Off Your Mortgage Early
If youre trying to decide whether to budget extra money to pay off your mortgage early or invest the money instead, you really can and should run the numbers.
Generally, its going to make sense to attack your high-interest debt before investing. But, especially compared to or personal loan debt, mortgages often arent high-interest. So while it may seem counterintuitive, in many cases youre better off sticking with the scheduled mortgage payments and using your extra funds to invest. Use a home loan calculator to determine how much youll save in interest by paying off the mortgage early. Then, see how those savings stack up against the return youre likely to make from investing.
For example, say you have a 30-year mortgage for $250,000 at a 6.5% interest rate. If you continued to pay your mortgage as scheduled, you would pay $318,861 in interest over the 30 years. If you put an additional $300 towards the mortgage each month, though, you would save $125,514 in interest and pay off the mortgage 10 years and four months earlier. Sounds hard to beat, right? But if you were to put $300 a month into an index fund for 30 years, you could expect to make more than $450,000.
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Paying Off Your Mortgage Early: Pros And Cons
Mortgage pay off can help save on interest but you may be missing some benefits.
A mortgage will likely be your biggest, lengthiest investment. And if you’re like many homeowners, you have a 30-year mortgage and seemingly never-ending monthly payments.
Whether it’s three decades or a 20-year or 15-year mortgage, this debt doesn’t go away easily and it constantly weighs on you when you plot out your financial goals. This has some borrowers dreaming about how to pay off their mortgage early to eliminate that bill. A mortgage payoff is not an insurmountable task. It can be done with proper planning.
The first thing you should do is explore your home loan options by visiting sites like Credible. Learn more about refinancing with different mortgage lenders and save money long-term.
If you’re already ready to pay off your mortgage early and you don’t need any help doing so, then you should read on to learn about the positives and negatives of this option.
Will Other Investments Beat Paying Off A Mortgage Early
Is it better to pay off your mortgage or invest? Ultimately, its a personal decision, but investing could be more sensible.
Sadly, the math tells us its almost always better to invest in other places than in your mortgage, says Richard Bowen, CPA and owner of Bowen Accounting in Bakersfield, California.
Mortgage rates are lower than theyve been in recent years, so if paying off your mortgage early leads to a return equal to your interest rate, that return would likely be lackluster compared to the annualized return for the S& P 500 roughly 10 percent over the last 90 years.
A potentially better use of the funds might be to take the cash youd use to pay off your mortgage and leverage it into buying a cash flow-positive property like multi-family real estate or single-family homes that have the potential to offer higher long-term returns, Bowen points out.
Any choice poses a risk, however. Even after paying off your mortgage early, real estate prices could plunge, leaving you with a potential loss. Carefully consider which risks youre willing to take. Ultimately, you might be better off not paying your mortgage off early.
The thing is, no one can give you a guarantee on an investment, Bowen cautions. You can put your money in the stock market and lose it. You can put your money in real estate and it doesnt perform as well as you expected it to.
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