Is Paying Off My Mortgage A Smart Move?
It stands to reason that a mortgage is a long-term commitment. The most common mortgage terms are 15 years and 30 years. A decision you make at 25 will influence your finances up to 40 and 55, respectively, if you consider the average terms of a mortgage. Mortgages involve debt, and this debt can be well beyond any other arena in your life. The good news is that mortgages can be paid off early, thereby saving tens of thousands of dollars (or more) in interest over the life of the loan. Knowing your own finances can help you determine if paying off your mortgage early makes sense.
Paying Off Your Mortgage Early Carries Benefits
There are a few benefits to paying off your mortgage early. The first benefit is that you lose a bill or liability that eats into your monthly budget. A mortgage is often the largest monthly cost in your budget. Paying off your mortgage means that this monthly payment no longer goes out and remains in your pocket. There are a lot of things, like cars, vacations, and retirement accounts that an annual mortgage payment can quickly fund.
The average mortgage payment in Michigan, and the United States, hovers around $1,200 to $1,300 a month. If you were to multiply this average amount out by 12 months in a year, you pretty quickly end up with a significant amount of cash that could be going to fund other things.
The next consideration is that paying off your mortgage early cuts down on the amount of interest you will pay over the life of the loan. Depending upon your mortgage term and rate, this may be a significant amount. Even though the monthly payment remains steady with a fixed mortgage, the amount of money that stays in your pocket is no small amount when it comes to paying off a mortgage early. Even a difference of paying your mortgage off five or ten years early can accrue a significant amount of savings.
Lastly, paying off your mortgage early means you own your home, free and clear, sooner rather than later. This feeling alone drives many to pay off their mortgage early, as it can be the source of an important sense of security and confidence in your financial life. As mentioned earlier, the money freed up by paying off your mortgage is in its own sense a liberating feeling. Imagine the thought of knowing that your home belongs only to you.
Paying Your Home Off Early Can Hurt (A Little)
Many homeowners take advantage of the mortgage interest deduction rule. Paying your mortgage each year actually provides a tax benefit. While you should always talk with your Accountant or tax preparer first, paying off your home will reduce the mortgage interest deduction from your taxes.
Paying off your mortgage early also influences your credit score, and it can actually pull your score down if you pay off your home. Obviously, this detail should be considered alongside other aspects of paying off a mortgage early, but it is something to consider. It seems counterintuitive that paying off debt could hurt your score for determining if you can pay off a debt, but it is a reality of the system. If you are planning to make other large purchases, it may make sense to delay paying off your mortgage. However, again, this is something in which you want to talk to a professional to understand your specific circumstances.
Always Weigh Your Own Considerations
The money that you use to pay off your mortgage could also go towards other things. In economics, this is called an opportunity cost. You could otherwise spend the money on purchasing something else or making investments. The opportunity cost of paying off your home in lieu of investments is that you are forgoing the money that the investment would have made. Talking with a professional financial advisor can help you make the right decision.
Prioritizing your debt repayment is also another important point when it comes to paying off your mortgage early. Your mortgage may or may not be one of the lowest interest rates you are charged. Depending on your own circumstances, paying off other debt with higher interest rates could save you money over the long term.
Lastly, cleaning out your savings to pay off your mortgage may or may not be worth it. Depleting the reserves that help you protect against emergencies might actually place you at more financial risk. This is something to ponder any time that you seek to pay off debt.
If your financial situation changes, its always a good idea to talk with your lender and understand the consequences of any action. For some loans, there are prepayment penalties, although these are becoming less common with mortgages. This is why working with a trusted mortgage broker like Range Lending can be a real gamechanger. Let Range Lending’s team of mortgage professionals help you navigate paying your home off early by answering those critical questions that help you understand the ramifications of the act. Speak with a mortgage professional at Range Lending today!