AD| When buying a house, one of your goals is to pay off the mortgage as soon as possible. But is paying off your mortgage early worth it? There are a lot of factors to consider before making a decision. Here are four factors to remember when deciding whether to pay off your mortgage soon.
How much interest will you save?
The first factor to consider is how much interest you’ll save by paying off your mortgage. To calculate this, you’ll need to know your mortgage rate and the remaining balance of your loan. The higher your mortgage rate, the more interest you’ll save by paying off your loan early. For example, on a $200,000 30-year fixed-rate loan at 4%, you would save $23,143 in interest by paying off your mortgage five years early.
What is the cost?
If you want to pay off your mortgage soon, one option is mortgage refinancing. Refinancing allows you to take out a new mortgage with a lower interest rate or shorter term to save on interest payments. However, keep in mind that refinancing can have costs associated with it. These costs include mortgage origination fees, closing costs, and other fees. So, you’ll need to factor these into your decision.
It will also cost you prepayment penalties and lost interest in your investments. Most loans come with a prepayment penalty of 2-5% of the loan amount if you pay off your mortgage within the first few years. This penalty goes away after that period. You’ll also lose out on potential earnings from investing that money elsewhere. For example, if you have a $200,000 30-year fixed-rate loan at 4% and invest the money you used to pay off your mortgage at 6%, you would have $40,000 more after 30 years.
What are your financial goals?
Your financial goals should play a role in deciding whether or not to pay off your mortgage early. For example, if one of your goals is to retire as soon as possible, paying off your mortgage may not be the best use of your money. You could invest it instead and let compound interest work for you. On the other hand, if one of your goals is to become debt-free, then paying off your mortgage may be the best way to achieve that goal. Mortgages are typically the biggest debt people have. If you plan on using your home as a rental property, paying off your mortgage soon is also wise. This way, you would free up cash flow to make other investments in the future.
What’s your mental attitude toward debt?
Some people hate being in debt and feel a great sense of relief when they’re finally debt-free. If that’s how you feel about debt, paying off your mortgage may be worth it for peace of mind, even if it doesn’t make financial sense from a strict numbers perspective. In addition, if you’re the type of person who likes to stay on top of your goals, paying off your mortgage may be a great way to meet that goal since it will give you a sense of accomplishment. However, if you’re comfortable with debt and don’t mind having it, investing that money might make more financial sense instead of potentially higher-return investments.
What other debt do you have?
Finally, consider any other debts you may have. If you have high-interest debt, such as credit card or student loan debt, paying off those first may be a better use of your money than paying off your mortgage. Additionally, it’s best to build up those funds if you have low emergency savings. This gives you a financial cushion in an emergency and avoids taking on more debt. A plan to pay off other debt also gives you more flexibility if you decide to invest or take on other projects that require extra funds.
Is Paying Off Your Mortgage Early Worth It?
Yes! Paying off your mortgage can be a great way to save money on interest, become debt free faster, and give you peace of mind. It allows you to become debt-free sooner, so you can focus on other financial goals, such as saving for retirement or building wealth. The only key is to ensure you’re weighing all the factors before deciding and starting the process. If you’re considering paying off your mortgage now, carefully consider its costs, financial goals, attitude toward debt, and any other debts you may have. When done right, paying it off can be a great decision for many people. Who doesn’t want a debt-free life?
Consider your mortgage rate, cost of refinancing, potential investment earnings, financial goals, mental attitude toward debt, and other debts. These factors will help you decide. Good luck!