Getting rid of debt is usually a good thing but if you’re wondering “should I pay off my mortgage early?” You need to stop and consider all the pros and cons. We take a look at the benefits of paying off a mortgage early, and also any possible disadvantages. As always work with a trusted financial and mortgage professional when considering such decisions.
Pros of paying off a mortgage early
You may like to think you own a home but the reality is, if you have a mortgage, it’s the bank who owns it. So if you can pay off your mortgage early, to do so is an attractive proposition. Not only will you own the bricks and mortar you live in, without any ties to the bank, you’ll also be saving tens, or even hundreds, of thousands of dollars in interest.
Not having a mortgage, or reducing your mortgage significantly, takes the pressure off your finances and allows you to readjust your work commitments. It gives you freedom and options to use your money for other things, such as starting your own business, buying an investment property, or stashing it away for retirement.
If you’re not good at saving money, then making higher payments on your mortgage enforces you to utilize your money to pay down debt, rather than spending it. Putting all your extra cash into your mortgage, watching it adjust online and the years being quickly shaved off can be a big incentive.
Lastly, owning your home gives you security. If you lose your job, or mortgage rates rise, your family can have peace of mind that they will always have a roof over their heads and avoid the worry and stress of not being able to meet mortgage payments.
Cons of paying off your mortgage early
Paying off a mortgage early is a serious financial commitment. You may have to take on a second job or side hustle to generate the extra cash. And everything you earn will go on the mortgage. You need to ask yourself - am I mentally prepared to hand over large chunks of hard earned cash to the bank when there are lots of other things I could spend it on?
For instance, you could pay off your mortgage or invest the extra money elsewhere at a potentially higher interest rate than the rate of the mortgage interest. So if you would rather have a cheap mortgage and your money invested elsewhere earning a higher interest rate, then don’t be in a hurry to pay back your mortgage. Working with your financial professional should help you weight your investment options and determine if paying down your mortgage is a prudent decision.
A homeowner who pays off their mortgage early isn’t desirable for a bank either, so check the terms and conditions of your mortgage for prepayment penalties. Mortgage lenders sometimes charge a penalty for paying off a mortgage early because they will be missing out on years and years of interest payments. A substantial penalty fee may not make it worthwhile to pay off your mortgage.
Even if you dislike having a mortgage, making the payments every month will build your credit profile. A good credit profile makes it easier to borrow money later on if you ever need to. So think long term before you decide to pay off your mortgage.