Disadvantages Of Paying Off Mortgage

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Mortgage prepayment can be a wise financial decision. Once you stop making payments, you’ll have more money to play with each month and you’ll save money on interest.

Making extra mortgage payments isnt for everyone, though. You might be better off investing the money or concentrating on other debts instead. The benefits and drawbacks of paying off your mortgage early are listed below.

The pros of paying off your mortgage early

Save money on interest. Each month that you make a mortgage payment, some money is going toward interest — so the fewer payments you have, the less you will pay in interest. Paying off your mortgage early could save you tens of thousands of dollars. (Just make sure to clarify with your lender that all extra payments will just be going toward your principal, not interest.)

No more monthly payments. By eliminating monthly mortgage payments, you free up that cashflow to put toward other things. For example, you could invest the extra money or pay for your childs college tuition. The average monthly mortgage payment is currently $2,064 on a 30-year fixed mortgage and $3,059 on a 15-year fixed mortgage—paying off your mortgage could free up a sizable chunk of cash for you to save or put toward other expenses.

You own the home outright. If you hit a financial rough patch, theres the possibility that you wont be able to afford monthly mortgage payments. Your house could be foreclosed upon if you default on payments. When you completely own the home, theres no chance of losing the house.

Peace of mind. You may simply like the idea of not having a mortgage hanging over your head. The freedom that no mortgage payments gives you is a powerful motivator.

The cons of paying off your mortgage early

Earn more by investing. The average mortgage interest rate right now is around 6%. The average stock market return over 10 years is about 9%. So if you pay your mortgage off 10 years early vs. invest in the stock market for 10 years, youll most likely come out on top by investing the money instead.

Mortgage prepayment penalties. A mortgage prepayment penalty is a fee you pay the lender if you sell, refinance, or pay off your mortgage within a certain amount of time of closing on your initial mortgage — usually three to five years. Not all lenders charge this fee, and you probably dont need to worry about it if youre waiting more than five years to pay off your mortgage. But you should always ask your lender first.

Lose the mortgage interest tax deduction. As a homeowner, you can claim the amount you pay in mortgage interest on your taxes to lower your taxable income. Youll lose this perk by paying off your mortgage early.

Hurt your credit score. Several factors make up your credit score, and one is your mix of credit types. For example, maybe you have a credit card, car loan, and mortgage. By taking away one type of credit, your credit score will decrease. This should be a fairly small drop, but its something to consider.

Questions to ask yourself before paying off your mortgage early

You should have a plan in place for how you’ll spend the extra funds if you’re paying off your mortgage early to increase your monthly cash flow. If you want to invest $900 each month in place of your $900 mortgage payment, that could be a good use of the money.

In the end, it’s up to you how to use the extra money. Paying off your mortgage early might not be the wisest financial decision, though, if you can’t think of what you want to do with the money. Keep in mind that even after paying off your mortgage, you’ll still need to pay for maintenance and homeowners insurance.

How does paying off your mortgage early fit into your retirement plan?

The answer to this question will be different for everyone.

Paying it off now so you won’t have to make monthly payments in retirement may be the best course of action if you know you’ll stay in this house after retirement.

However, investing will be a better use of the money than paying off the mortgage early if you are, say, 10 years from retirement and haven’t started doing so.

Do you have other debts to pay off?

You should prioritize paying off higher-interest debt before lower-interest debt, according to the general rule of thumb. Paying off your credit card or private student loan early could save you more money than paying off your mortgage because you may be paying a higher rate on those items.

However, avoid paying so much toward your higher-interest debt that you run the risk of falling behind on your mortgage payments Yes, credit cards can be pricey, and if you don’t make your payments on time, the issuer may sue you. However, missing mortgage payments can be even riskier because you run the risk of losing your house.

What other options do you have?

Making additional mortgage payments isn’t your only option if you want to eventually free up some cash in your monthly budget or avoid paying interest.

By extending the loan term or lowering the interest rate, refinancing can help you reduce your monthly payments and give you more time to pay off the balance.

Refinancing into a shorter term will enable you to pay off your loan earlier while also saving you money on interest.

Consider a lump sum payment or mortgage recast if you have a sizable sum of money you want to put toward your mortgage.

With a lump sum payment, you make a single sizable payment toward your principal in order to pay off your mortgage sooner. However, if you recast, you pay the same lump sum and ask your lender to determine your new, lower monthly payment based on your new principal amount. Following that, your term length and subsequent monthly payment will both be the same.

Whether you should pay off your mortgage sooner or later has no clear right or wrong answer. It depends on your situation and your personal goals.

To determine how paying off your mortgage early might impact your finances, use our free mortgage calculator. Enter your numbers, then click “More details” to learn more about making monthly additional payments. You can also calculate your monthly principal payment using a formula, but a mortgage calculator is typically simpler.

Mortgage Calculator Home Price Down payment

Paying a 25% higher down payment would save you $8,916.08 on interest charges

Lowering the interest rate by 1% would save you $51,562.03

Paying an additional $500 each month would reduce the loan length by 146 months

You could own your home sooner if you made a small monthly mortgage payment of a few hundred dollars. However, even if you don’t have much extra cash each month, you might choose to contribute just $50 or $100 to your debt.

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FAQ

Is there a disadvantage to paying off mortgage?

Usually, paying it off necessitates a cash investment equal to the principal. This payment could potentially jeopardize a middle-class family’s ability to invest for college, save for retirement, keep an emergency fund, and meet other financial obligations if the principal is sizable.

Why should you not fully pay off your mortgage?

As Schoonmaker explains, “Once you pay off the mortgage, it might be difficult to get the money back, especially since a time of financial need may be the exact time that it is hardest to get a new loan.” And as for taking money out of your retirement, just don’t do it unless you have to.

Is it better to pay off a mortgage or not?

You want to reduce your interest payments because they can add up to thousands of dollars over the course of a home loan, depending on its size and term. Early mortgage repayment frees up future funds for other purposes.

Why should you not pay off your mortgage early?

By reducing your mortgage balance, you essentially lock in a return on your investment that is roughly equal to the loan’s interest rate. When you pay off your mortgage early, you are effectively investing money that could have been used elsewhere for the mortgage’s remaining term, which could be up to 30 years.