Sometimes paying off the mortgage early is a good idea, and sometimes your money is better spent elsewhere! Here are six questions to ask before committing yourself to being mortgage-free within the next couple of years ….
“With consumer revolving debt balances declining nationwide and home values flat, some homeowners are considering paying off their mortgages early,” says Freedom Debt Relief (FDR) vice president Kevin Gallegos. “For people who are staying put in their home for some time, paying a mortgage off before the end of its term has benefits. Obviously, making extra payments eliminates the loan debt faster. This in turn dramatically lowers the total interest paid over the life of the mortgage.”
But not everyone gains from paying off the mortgage early. Gallegos suggested consumers take these factors into consideration before launching any accelerated payment process…
Before Deciding to Pay Off the Mortgage, Ask…
Before we get into the questions that will help you decide if you should pay off your mortgage, you should know that my husband and I paid off ours early — and didn’t regret it for one second! Especially in these low-interest rate days (there’s nothing else to invest our money in!). At the end of this article, I’ll tell you how we did it.
In the meantime, think about these factors before deciding about paying off your house debt.
Are my other material needs under control?
For anyone, paying off credit card debt and contributing the maximum to a retirement plan are goals that should beat out paying off the mortgage early. Those planning to retire soon might find it appealing to eliminate the mortgage. “It’s most important, in that situation, to be sure you will have enough cash to fund your retirement,” said Gallegos. Consumers should ask: Can they afford to pay more each month? Do they have an emergency fund that could cover six months’ living expenses? If not, they should rest content with paying the mortgage as scheduled until these safeguards are in place.
Am I planning to buy a new home soon?
Homeowners who might sell soon would do better to put extra cash in a fund for a new home down payment. “The market is still a bit wobbly in most locales,” Gallegos said. “And mortgage lenders are demanding higher down payments than in recent years. If you plan to relocate soon, hang on to your cash for the move.” If you’re moving, then paying off the mortgage early isn’t a good idea (though that’s how we did it!).
Are there prepayment penalties if I pay the mortgage off early?
Most mortgage loans do not have a prepayment penalty. But those that do present heavy charges for paying the balance off early. Review the Truth in Lending disclosure to find out.
What is the mortgage interest deduction?
Making extra payments earlier in the life of the mortgage makes a bigger difference in the amount of interest the bank collects over the years. Homeowners who itemize deductions reap tax benefits from paying mortgage interest. Naturally, paying a smaller amount of interest results in a lower total itemized deduction amount. (To find out the potential savings, multiply the mortgage interest paid by the applicable tax bracket.) The difference could be thousands of dollars annually, so plan accordingly.
How should I invest money if I’m not paying off the mortgage?
Find the rate of return for a paid-off mortgage with an online mortgage tax-deduction calculator. Then compare it to potential earnings on investments. Most people would fare better by investing the money instead of paying the loan, especially when considering the interest saved over time. Those who can pay the mortgage off early might do well to do so and then invest what had been spent on monthly payments in a savings or retirement vehicle rather.
4 Ways to Pay Your Mortgage Off
- Pay off any excess debt, and then add any available income to the mortgage payment. This is simple to do if the statement has a line for “additional principal.” If not, check with the lender to find their preferred method – and confirm there is no prepayment penalty.
- Look into biweekly payment plans, which some mortgage companies offer. These plans usually involve a set-up fee as well as a monthly charge. Traditionally, mortgage payments are made monthly, with 12 payments per year. A biweekly payment plan has the borrower pay half of a regular mortgage payment every two weeks — equating to 26 half-payments over a year. Without adding much to the monthly budget, a homeowner making a biweekly mortgage payment is effectively making one extra mortgage payment per year.
- DIY – simply pay half the mortgage biweekly. Note that some mortgage companies will return a check that is less than the amount of the bill or received at an odd time. Others may charge a mortgage prepayment penalty. Check the lender’s policies carefully.
- Divide the monthly mortgage payment by 12. Then add that amount each month to the regular monthly payment (write it on the “Additional Principal” line of the statement). Doing this every month will result in an extra month’s payment each year.
“Paying off a mortgage can be a great relief. On the other hand, with mortgage debt, you’re paying to own your own home, with beneficial tax deductions,” said Gallegos. “Either option can be a good one. Consider your complete financial picture before choosing the right path to home ownership.”
For more tips on paying off your home debt, read Pay Off Your Mortgage – 5 Ways to Make Mortgage Payments Go Away.
To learn more about home debt, read Mortgage Ripoffs and Money Savers: An Industry Insider Explains How to Save Thousands on Your Mortgage or Re-Finance.
Source of mortgage payment questions: Freedom Debt Relief, provider of consumer debt resolution services.