Your monthly mortgage payment is likely your biggest expense. Why and how do some people pay it off early? And are there any downsides to paying off your home loan ahead of schedule?
Every homeowner dreams of the day when they pay off their mortgage – and this dream is so strong that many people plan on paying off their home loan early. In this article, we look at the benefits and potential pitfalls of an early mortgage payoff.
Why Pay Off Your Mortgage Early?
First, let’s talk about the pros of getting that mortgage paid ahead of time:
You own your home. When you have a mortgage, there’s always a chance you might not be able to make the payments – which could lead to losing the home you love. But when you own the home outright, that fear vanishes.
No more monthly mortgage payments! Who wouldn’t love to have their largest monthly bill paid off? The extra cash could go into investments, savings, or your retirement.
You pay less in interest. The longer you pay your loan, the more the interest adds up. By paying off your mortgage early, you could save thousands of dollars in interest paid over the years.
Sounds great, right? If you can afford to pay more than your monthly loan amount, you’re on the fast track to these perks. But there’s one thing to know: If you choose to pay extra on your monthly mortgage, make sure the additional amount is paying off your loan’s principal (the amount you owe). Some mortgage lenders will simply apply the extra money to the next month’s interest.
Why Some Don’t Pay Off Their Loan Early
As great as all the benefits sound, there are some homeowners who (despite being able to afford the extra payment) choose not to pay off their mortgage early. What are the reasons behind this decision?
Your loan has a prepayment penalty. Also known as an early termination fee, this can be a percentage of the remaining balance, a flat fee based on the monthly interest, or another amount based on the length of your mortgage. This offsets the money the lender would lose from your interest payments – and cuts into the money you save.
You want to keep the cash flow going. If overpaying on your mortgage is going to make you cash-poor, it’s more important to maintain some liquidity. This way, you can save money or meet unexpected expenses without undue strain.
You prefer to invest or save. Some homeowners decide they can put their money to better use by investing it instead of paying off a low-interest loan. (Most mortgages have much lower interest rates than, say, credit cards.) Or they may simply choose to save the money against future need.
Additionally, it’s good to note that paying your home loan off early may lower your credit score, at least temporarily. Also, you’d no longer be eligible for the mortgage interest deduction on your taxes.
What About Refinancing?
Refinancing with a shorter-term mortgage is another option for homeowners who want to pay off their home loan in a hurry. However, refinancing your mortgage also comes with its own costs. Your best bet is to talk with your mortgage lender about your goals and options. Here at Mortgage 1-Jackson, we want to make sure you get the best advice and the best mortgage for your needs.