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Should I Pay My Mortgage Off Early?
Benjamin Franklin once said, “Rather to go to bed without dinner than to rise in debt.”
We don’t mean to disagree with Mr. Franklin, but living debt free today isn’t always the right approach for every situation. In fact, if you’re thinking about paying off your mortgage early to get out of debt, keep reading for a few factors you should consider first.
Is it Better to Pay Off Mortgage or Save Money?
Maybe you’ve just come into a windfall or perhaps you’re thinking about cashing out another asset to pay off your mortgage. You might want to hold the phone on that call to your mortgage holder.
First, consider how you plan to pay off your debt. Using liquid assets, such as an emergency savings, is rarely a good idea. For one thing, you’ll be turning that liquid asset into an illiquid asset.
That means the money is no longer readily accessible for emergencies. In order to gain access to funds you’ve used to pay off your mortgage, you’ll have to take out another loan, possibly at a higher interest rate than your original mortgage or even have to refinance your home, and lo and behold—you’ve got a mortgage again!
Keep Your Whole Financial Plan in Mind
Any decision about your mortgage should take your entire financial picture into account. If you currently owe on high interest debts, such as credit cards, you’d be doing yourself a disservice by paying off your mortgage first. Take the money and pay down your higher interest debts first before contributing any of your funds toward paying off your mortgage early.
Before you make a decision like this it’s a good idea to discuss it with your financial advisor. He or she can help you evaluate the short- and long-term benefits of such an important decision for your situation.
3 Ways You Can Pay Off Your Mortgage Faster
Refinance to a Lower Interest Rate
What is the interest rate of your current mortgage? If market rates are lower than the interest you are paying, it might make more sense to reduce the monthly payment of your mortgage by refinancing to a lower rate.
Shorten the Term Length of Your Mortgage
A 30 year mortgage, for example, can be refinanced to a 15 year mortgage, reducing the length of time it takes to pay off your home loan. This could have the added bonus of decreasing your interest rate but it may increase your monthly payment, If you can budget for that increase, you can drastically cut the time it takes to officially own your house.
Make One Extra Mortgage Payment a Year
If you have a financial plan in place, are actively funding your savings as well as retirement, and don’t have credit card debt, it isn’t a bad idea to think about paying off your mortgage early. However, you don’t have to do it all in one large sum. Instead, consider making extra payments over the life of the loan.
If you can make the equivalent of one extra mortgage payment a year, you’ll reduce the length of your loan by up to 5 years and save yourself a lot of money on interest. See how much you can save with our Mortgage Payoff Calculator.
Here are 3 things to keep in mind when making extra payments toward your mortgage debt:
First, the sooner you start making extra payments, the better. As long as you are applying additional funds toward principal, you’ll be reducing your mortgage debt.
The principal is how much you borrowed to pay for your home. Each time you make an extra payment on principal, you’re reducing the amount you have borrowed, thereby also decreasing the total amount of interest you’ll pay over the life of your mortgage.
Lastly, if you’re nearing the end of your loan or paying off a lump sum early, you’ll need to speak with your lender regarding the final payoff amount. Your lender will assess interest up to the pay-off date. They will let you know the balance of your final payment and how to make that payment so that it gets to the right place on time.
What Happens After I Pay off My Mortgage?
After you remit your final payment, it could take several months to receive the deed to your property, because it is released not by the bank, but rather the county in which the property is located.
You are now responsible for paying all property taxes and insurance for the duration of home ownership. This can easily be forgotten if your lender has held tax and insurance in escrow while you were making those mortgage payments.
While living free of mortgage debt may sound like a good way to secure your residence and prepare you and your family for a sound financial future, it might not be the right move. If you have questions about your finances, be sure to discuss them with your financial advisor or even your loan officer before paying off your mortgage. They have years of knowledge and experience and are an excellent resource for these all-important life-decisions.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.