For most of us, the idea of paying off our mortgage well in advance is elating. Before you make this big move, however, there are some things you need to consider, and what they could mean for you.
Some mortgages have prepayment penalties written into them. A prepayment penalty means you will have to pay the lender a percentage of the principal, or some other stated amount, if you decide to repay the loan early. While this may seem crazy (being charged for making your payment early!?), it’s actually quite common. The prepayment clause is usually in effect for only one to three years and may be waived for special circumstances. Lenders impose the penalty to recover any losses related to your early payment.
If you are in the market for a home loan, ask about prepayment penalties before signing on. If you are applying for a new loan, the penalty should be disclosed in the truth-in-lending statement. Read the fine print and weigh all your options.
If you already have a home loan, call your lender or dig through your paperwork to spot any prepayment penalty clauses you may have missed.
Prepayment penalties aside, the advantages of paying off debt early are increased cash flow, less interest paid and a higher credit score.
The disadvantage is a lower cash flow available as discretionary funds for meals, entertainment and other things. If the ultimate goal is financial security, is it worth the intermediate sacrifice?
Reasons you should…
- Peace of mind knowing that you don’t have a mortgage
- Interest savings no matter how low your mortgage rate is
- Lowering your housing costs before you retire
Reasons you shouldn’t…
- You can invest at a higher rate than yourmortgage
- You have other debt at a higher rate than your mortgage that needs to be paid off
- You might need the money in the future and want to remain liquid
- You might not qualify for a mortgage currently
- Your employer has a matching retirement plan that would benefit you more
- You have more urgent financial needs like emergency fund, life, health and disability insurance
- You expect high inflation and the value of your mortgage debt will decrease
Whether to pay off your mortgage early is a personal decision that may be right for one person and not for another. If you do decide it is right for you, there is no time like the present to begin your quest to pay off that mortgage. Start by reading your amortization schedule; once you see exactly how much of your monthly payment goes to interest, and what a tiny portion goes toward paying off the principal, you’ll realize that every extra dollar you send reduces the portion of your payment that services your interest expense. That can be a powerful motivator for financially savvy individuals.
Use this Mortgage Accelerator to determine how quickly you can pay off your mortgage.
If you focus your efforts on the task at hand, you may be surprised at how quickly you can retire a mortgage. With your mission accomplished, you will find that the comforts of home are even more pleasurable when it is you, not the bank, who owns your home.
With over 3 decades in the real estate industry, we have a wealth of real estate and homeownership information that may be of help to you. Feel free to contact us any time to learn more. We look forward to hearing from you!