Deciding whether you should pay off your mortgage early or invest that money can be a hard decision to make. While doing some mathematical calculations can guide you with your decision, there is actually more to this matter than just that. Psychology, your own immediate needs, risk tolerance, the market conditions of real estate, and of course, there are taxes as well. All these factors play a crucial role in making the perfect decision.
Producing extra payments on mortgage can help you save a large amount of money from interest. Homeowners who produce extra payments on mortgage generate returns that are equal to the interest rate of the mortgage minus the tax deductions. Based on today’s environment of the money market account, savings accounts, CDs, etc. paying less than 1% interest rate, while paying off your mortgage interest will offer you a return of 3 to 6% depending on the interest rates of your mortgage.
For those people who have made their first step and are now committed to their home, paying off their mortgage can seem like an impossible and distant dream. Sometimes, it is possible to finish that ultimate goal early, but is this worth it? Even though paying off your mortgage early can lower your monthly housing cost and can free up lots of income opportunity, there are still many disadvantages of paying off a mortgage early.
The Advantages of Paying Off Your Mortgage Early
– Eliminates interest and be able to receive a guaranteed return rate, which is equivalent to the interest rate minus all the tax deductions
– Own a home – holding a clear title of your home
– Financial flexibility and save money through the eliminations of interest payment and immense principal
– Own a property that is exempted from inflation
– Pass on your home without any liability aside from property taxes
Not considering the mortgage life cycle, there really is a huge benefit from repaying loans. Extra payments above your scheduled interest and principal payment will actually go directly to paying off your principal. It is always a wise idea that you specify extra payments for your principal, otherwise, the loan provider may apply for extra balance and this is not good.
The Disadvantages of Paying Off Your Mortgage Early
There are some cases in which paying off your mortgage early will serve to be advantageous. But for some individuals and families, there are other investment opportunities that will come along where their cash flow or extra money should be used. For example, retirement plans, college savings, auto debt, credit cards, and many more. Regarding this matter, assistance from a qualified financial can serve to be very beneficial to you.
– More taxes: Lose interest deduction of your mortgage
– Trapped equity: mortgage paid, but no earning opportunity unless your house will be sold
– Your home will appreciate with the same amount, despite your mortgage balance
– Potential investments lost
When considering whether to pay off your mortgage sooner or later, you should examine your current financial situation and also your short term and long term goals.