No doubt that early mortgage repayment can save thousands of dollars in interest charges; however, it's essential that you consider both its advantages and disadvantages before taking this path.
There are various strategies you can employ to reach the finish line sooner on your mortgage, such as refinancing to a shorter term, making extra payments or applying windfalls to reduce its repayment faster - but does this always make financial sense?
1. Less money for savings.
Mortgage payments are one of the highest monthly expenses homeowners must cover, so paying it off early can relieve you of one of your largest costs and free up money that can be invested or put toward other financial goals.
Decide for yourself whether this outweighs any missed interest rates on other investments or debt payments, such as credit card balances. Also keep in mind the tax benefits such as being able to deduct mortgage interest on your taxes.
Before rushing into paying off your mortgage early, always confirm with the lender about prepayment penalties. These can quickly add up and nullify any savings generated from early repayment - especially if using extra income generated elsewhere to pay it off early. It would be prudent to consult a financial advisor before making any big decisions regarding early pay-off.
2. Less money for emergencies.
While it can be satisfying to have one less debt, early mortgage payment could mean less savings for household emergencies or other goals. Therefore, it's advisable to set up an emergency savings account, save for retirement and reduce other forms of debt before speeding up mortgage payments.
Before paying off your mortgage early, it's also wise to inquire whether your lender charges any prepayment penalties. Although these can be costly and reduce any potential benefits from early repayment of the mortgage loan.
Mortgage-free status can give you peace of mind and make investing or crossing items off your bucket list more accessible. Before making this big decision, however, make sure it fits within your financial framework and does not impact other aspects of your life negatively.
3. Higher interest rates.
As your mortgage payments increase, so will interest payments. However, if you also owe other debts with higher rates (such as credit card or student loan debt ) it may cost more in the long run to spend extra cash towards paying down your mortgage than just repaying those other obligations first.
Paying off your mortgage uses up funds that could otherwise be put towards investments or saving for emergencies - not to mention that, unless you itemize, deducting mortgage interest becomes impossible.
Prepayment penalties, typically equaling a percentage of your outstanding principal, should also be taken into consideration before accelerating your repayment schedule. Doing so allows you to determine whether accelerating makes financial sense; especially when using inheritance or windfall money to prepay your mortgage early; otherwise it may be wiser to allow its regular term run its course.
4. Higher monthly payments.
Eliminating your mortgage could free up more of your monthly budget for investing, paying off debt or crossing items off of your bucket list.
But it may not be in your best financial interests if you use all your reserve funds to pay off your mortgage early, as that could deplete emergency savings and leave you exposed if an unforeseen change in finances or loss of employment occurs.
On the other hand, if your salary is sufficient and your lender doesn't charge a prepayment penalty, paying off your mortgage early could make financial sense. Doing so will save on interest payments while offering peace of mind; but before making this decision it's essential to carefully weigh all possible outcomes and create an emergency fund with at least 3-6 months worth of expenses saved as cushion.
