Buying property is one of the most significant financial investments a person can make in their life. In order to fulfill their American dream of being a homeowner, many people take out loans. However, paying off those loans fast is not always a good idea for everyone. Sometimes, paying off your mortgage early comes with its disadvantages. To help you make the right decision, we’ll go over all the pros and cons of paying off your mortgage early in the rest of this article.
What You Need To Know About Mortgages
If you want to buy a property in America, you will almost certainly need a loan. That’s probably why mortgage debt accounts for the biggest share of all consumer debt in the USA. They’re paid in multiple installments over a certain period, usually over 15 to 30 years.
What is important to note about mortgages is that they are secure loans. This means the property you buy with the loan will serve as security for your debt. If you stop paying your monthly installments, the lender can seize and sell your house. On the other hand, paying off your mortgage too early can also have its disadvantages.
Cons Of Paying Off Your Mortgage Early
As we said, paying off your mortgage early comes with both pros and cons. There are some of the most significant downsides of making extra mortgage payments to consider:
You Won’t Be Paying Off More Expensive Debts First
Although your home mortgage is probably your most considerable debt, you may benefit more from paying off credit card or vehicle loans first. This is because these loans have much higher interest rates than mortgages. So, while your mortgage may appear to be enormous, the interest on your smaller loans and credit agreements would actually be far higher. So, if you didn’t pay off your credit card debt before applying for a mortgage as suggested, consider putting it as a first priority if you have extra cash laying around.
An early repayment charge is a fee charged by your lender if you pay off your mortgage early or pay it off more than the lender allows. This cost isn’t charged by all lenders, and if you’re paying off your mortgage in more than five years, you generally won’t have to worry about it. However, you should always check with your lender first. These repayment fees can sometimes reach thousands, so you should always be extra careful.
It Can Hurt Your Credit Score
Your credit score is determined by several factors, one of which is the mix of the kinds of credit you have. You may, for example, have a mortgage and a credit card, and car loans. Your credit score will drop if you altogether remove one sort of credit. This should be a minor change, but it’s worth noting.
Pros Of Paying Off Your Mortgage Early
While there are some cons to paying off your mortgage early, you can’t possibly deny all the pros that come with it too. Here are some of the biggest advantages of doing so:
No More Monthly Payments Means Your Money Can Go Towards Other Investments
Paying off your mortgage early gives you financial freedom. You’ll have the extra money in your bank account each month because you won’t have to make any monthly payments. This means you’ll be able to spend that money on whatever you want. Alternatively, you can put that money toward paying off other debts you might have acquired over the years.
Another thing you can do with those funds is use them to buy a second house. You can use it for vacations or as a source of profit. Buying a house, especially in a different state, can be an excellent investment if you plan on renting out. Of course, buying a home long distance can sometimes be challenging. However, choosing from afar doesn’t have to be complicated with the right real estate agent.
If your mortgage is your sole loan, paying it off is the most effective strategy to achieve debt-free status for the rest of your life. As we said before, there might be fees associated with paying off your mortgage early. So, even if you have enough money to pay it off in full, talk to a mortgage expert to be sure you can afford it.
Save Money On Interest
A portion of your mortgage payment goes toward interest each month, so the fewer payments you make, the less interest you’ll pay. You may save tens of thousands of dollars by paying off your mortgage early. Just make sure you discuss with your lender that any additional payments would only be applied to the principle, not interest.
You Own Your Home
When you buy a house with a mortgage, you don’t technically own the house until you pay off your loans. Suppose you have a rough financial patch and can’t afford your monthly mortgage payments. In that case, your house could be foreclosed upon. There is no risk of losing your home when you can own it outright.
Lastly, you may simply enjoy the concept of not having a mortgage to worry about. The independence that comes with not having to pay a mortgage is an excellent motivator for many.
In Conclusion: Should You Pay Off Your Mortgage Early?
When deciding whether or not paying off your mortgage early is a good idea, consider how all the pros and cons would affect you personally. Decide what works best for you and what is most likely to help you achieve your financial goals. There’s not just one correct answer for everyone. For some people, owing money can feel very stressful. By paying off a mortgage early, they get a sense of relief that can’t be measured. However, if you want to save money by lowering your monthly payments, a mortgage payback isn’t the only option. Refinancing your mortgage might also help you save money by reducing your monthly payments.