Should I Pay My Mortgage Off Early?

Should I Pay My Mortgage Off Early?

Should I Pay My Mortgage Off Early?

It’s a question many homeowners ask themselves – should I pay my mortgage off early?

Here’s a look at some things to consider before making a decision.

Reasons to Pay Off Your Mortgage Early

1. Interest Savings

Paying off your mortgage early can save you money in interest charges over the remaining life of the loan.

This can be a significant amount of money – particularly if you have a large mortgage or a high interest rate.

2. Peace of Mind

For some people, the peace of mind that comes with being debt-free is worth the extra effort required to pay off a mortgage early.

The psychological satisfaction of being debt-free is hard to quantify.

You’ll no longer have to worry about making monthly payments or the possibility of foreclosure if you can’t make the payments. This can be a huge weight lifted off your shoulders.

And that relief can be extremely helpful for improving your life in other areas.

Maybe you can be more productive since you won’t be as stressed out.

Or maybe you’ll start something that you were too worried to try before.

Or maybe you’ll simply relax more.

Relief of Paying Off Your Mortgage

Whatever the case, paying down your mortgage early can be a huge emotional relief.

3. Home Equity

Paying off your mortgage early also means you’ll have more equity in your home – which can come in handy if you ever need to re-borrow money for home improvements or other expenses.

That is, by paying off your mortgage, it’s not as though the money is “gone.” You’ve simply built additional equity in your property.

4. Forced Savings Plan

Making extra mortgage payments can also serve as a forced savings plan, since you’re essentially paying yourself interest on the money you’ve already paid into your home.

And, as mentioned above, you’ll be building equity in the meantime. If you ever need to tap into that equity, you can via a refinance or by selling the property.

5. Lower Risk

Paying off your mortgage could be looked at like a low-risk “investment.” You’re investing in something that will save you an amount equivalent to the interest you would have had to pay.

And by making this “investment,” you won’t have to continue making mortgage payments each month. That means your monthly cash flow situation will improve.

That extra cash flow can make an otherwise risky investment a lot lower risk.

Especially if you’re worried about the stability of the housing or rental market, paying off your mortgage early can help to secure your property against the threat of foreclosure from your lender.

Sure, your returns might end up being lower than if you stayed leveraged, but you’re benefiting from a lower risk position in the meantime. It’s a trade off.

Reasons NOT to Pay Off Your Mortgage Early

1. Pre-Payment Penalty Charges

In some cases, paying off your mortgage early can result in pre-payment penalty charges from your lender.

These pre-payment penalties can range from a few hundred dollars to several thousand, so it’s important to check with your lender before making any early payments.

However, most mortgages allow pre-payment (at least after some period of time).

Be sure to check the terms of your loan agreement before making any extra payments.

2. Low Interest Rates

If you have a low interest rate on your mortgage, it may not make sense to pay it off early. You may be better off investing the money you would have used to pay off your mortgage and earning a higher return on that investment.

Similarly, if you have higher-interest debt elsewhere, it probably makes more sense to pay down that debt first instead of paying your mortgage off early.

And given how real estate debt terms are typically a lot better than other loans, chances are you have other, higher-interest debts you can focus on first.

3. Limited Cash Flow

If you’re already tight on cash flow, making extra mortgage payments may not be feasible.

Make sure you have enough money left over each month to cover your other expenses and save for other necessities before you make extra mortgage payments.

4. Tax Deductions

The interest you pay on your mortgage is often tax-deductible (up to a certain amount). Paying off your mortgage early means you’ll lose out on that deduction.

Granted, you are saving money by not paying that interest. But it might not be the most tax efficient strategy.

Taxes can get complicated very quickly, so consult with a tax professional to figure out what the best course of action is for you.

Tax Consequences of Paying Off Your Mortgage Early

Weighing the Opportunity Cost of Paying Off Your Mortgage

Every decision has a cost.

The cost of paying off your mortgage early is the opportunity cost of not having that money available for other purposes.

For example, if you have a mortgage at 5% interest and you use some extra cash to pay it off early, you’re essentially giving up the opportunity to earn more than a 5% return on that money if you were to invest it.

Maybe that is worth it to you. Or maybe you have an attractive opportunity to earn much higher returns than that elsewhere.

So, you need to weigh the cost of paying off your mortgage early against the opportunity cost of investing it (or using the money towards anything else).

Paying off your mortgage early is a big decision – one that shouldn’t be made lightly.

Using Debt to Scale Your Portfolio

Real estate in particular has access to great financing options.

Especially with owner-occupied loans, common real estate debt terms include:

  • 30-year terms
  • Low down payments
  • Fixed interest rates
  • Relatively low interest rates
  • Non-callable debt

Compare this to other forms of debt that might have higher rates or otherwise worse terms.

By using debt with these relatively great terms, you can acquire more properties more quickly.

Of course, this comes with risk – if your property values decrease or you’re unable to make your payments, your portfolio could be in big trouble.

But, if things go well, and you manage your credit carefully, using debt can help you acquire more properties while earning higher returns than you would have if you paid entirely in cash.

Conclusion – Should You Pay Off Your Mortgage Early?

So, should you pay your mortgage off early?

As always, it depends.

There are pros and cons to doing so, and the answer varies based on your individual preferences.

If you weigh the opportunity cost of paying your mortgage off early, and you feel comfortable with the decision, then paying it down early can be a great idea.

But, if you’re not sure you can afford it, or if you’re already tight on cash flow, it may not be the best move for you.

There’s no one size fits all answer. Weigh the pros and cons carefully and make the decision that’s best for you.

This website, and any communication stemming from it, should not be taken as financial or legal advice for your specific situation. Consult directly with a licensed financial professional should you need investment advice and consult directly with a licensed attorney directly should you need legal advice. Assume all links are affiliate links. I am an Amazon affiliate.

Jack Duffley

Jack Duffley is a real estate investor and attorney based in Houston, TX.

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