Paying off your mortgage early can save you thousands of dollars in interest. Homeowners that have a mortgage have a certain amount of stress every month when their monthly mortgage payment is due.
But, that is not the only thing you should take into consideration. Although paying off the mortgage early is a good idea for most homeowners, at the same time, it is important to be aware that there are some draw-backs to paying off your mortgage before its term.
Reducing Your Monthly Expenses
Paying off your mortgage early will reduce your monthly expenses considerably. It is always nice to reduce your financial burden. If you are in a position to settle your mortgage debt earlier than planned, it probably means that you have been working hard to do so.
The process starts long before you make a final payment. It is always best to contact your mortgage lender well in advance to let them know your plan. Before you do so, make sure you read the terms and conditions of the mortgage. Ensure that there is no pre-payment penalty of paying off your mortgage early.
Be On the Look Out for Costs
Many homeowners are not aware of or have forgotten minor details of their agreement with their lender. After all, the lender is counting on receiving a certain amount of interest from the mortgage. If you pay off the mortgage early, you may occur some financial charges you need to settle. Remember there may be a pre-payment penalty. Make sure you are aware of the terms and conditions of your mortgage before you sign those loan docs.
Explore New Investments
Don’t Put All Your Eggs in One Basket! Once you have paid off your mortgage, you should start thinking about what you would like to do with the money you are saving every month. Bank saving rates are still low, and your local bank may not have any attractive savings options in place.
Consider investing in other financial savings options, but do make sure they are safe and secure. There is little or no point in paying off your mortgage in order to put your money into risky investment schemes.
Keeping Your Money Safe In a Volatile Market
Treasury securities and bank-guaranteed savings plans are a good idea but do not deliver high returns. It is not likely that these investments would deliver a greater return than the interest rate on your mortgage.
The best thing you can do is to sit down and consider how you should be investing your money. Thinking outside the box can help a lot. For instance, people who have invested in vintage cars have seen some fantastic returns. Before you invest in something such as a vintage automobile, do your research to ensure they consistently have a good return on investment.
Another important factor is to consider how much you are going to lose in your annual tax deduction once you have paid off your mortgage early. Remember, mortgage interest is tax-deductible, and once it is paid off you will lose that deduction on your annual taxes.
Extra Money to Spend
Yes, you will have extra cash which is just great. If you are not planning on saving the cash, what are you going to do with it? Many homeowners who pay off their mortgage early do so in order to realize a dream. They may want to spend a year or two working really hard, and then travel the world. All that extra cash is indeed tempting but no matter what you do, you should not waste it.
Instead of spending a small fortune on frivolous items per month, you want to make sure you put it to good use. Using spare cash to realize a dream is not such a bad idea, but don’t forget to plan ahead. Living the dream can cost more money than you may first think.
You should save your money! Don’t waste money on frivolous expenses!
Losing Your Mortgage Insurance
Mortgage insurance is another financial burden linked to your mortgage. Once your mortgage is reduced to 20% of the equity in your home, you are no longer required to pay private mortgage insurance or PMI. This is another great reason for paying off your mortgage early or reducing it to a more manageable level.
Reducing Your Mortgage versus of Paying It Off
In fact, it could be a good idea to pay off most of the mortgage until it represents 20% of the equity in your home. Paying off a mortgage, or any type of loan early can have a small negative effect on your credit score. A potential future lender may look at it in a slightly negative way than you do.
There is also something else that should be considered. Once you have paid off your mortgage, you may have difficulty borrowing money against the property. Your income may not be sufficient to qualify again for a mortgage.
If you are planning any major home improvement projects, you should ask yourself if it is worth paying for them in cash or from your savings. Remember that many home improvement stores such as Home Depot will offer interest-free financing for a period of time (such as 24 months) if you are purchasing appliances, window coverings, or carpeting. It may be better to utilize
It often costs less to take out a loan to pay for home improvements, and using your mortgage lender to obtain a further loan, could have financial advantages.
In other words, consider all aspects before you jump. Yes, your mortgage insurance is a financial burden, and your mortgage probably costs you rather a lot per month, but your annual tax deduction could be worth hanging onto. Be sure not to pay off the mortgage with your entire savings, and then have no resources left! You want to be smart about your financial investments, and don’t leave yourself at risk with no back-up.
Find Other Valuable References for “Should I Pay Off My Mortgage Early?” from Real Estate Professionals Across the Country. Please consider sharing on Social Media if you liked the articles.
Luke Skar has written a very informative article about Mortgage Insurance and how it works. He discusses the importance of speaking to your lender about your loan to value ratio and the different types of loans that are available
There are Pros and Cons of paying off your Mortgage Early which was written by Bill Gassett. He discusses how enticing it is to a homeowner to pay off a mortgage, but there are other factors to consider.
About the Author
The above real estate article “Should I Pay Off My Mortgage Early?” was written by Sharon Paxson a top Newport Beach CA Realtor. We have experience since 2005 representing sellers, buyers, and landlords with their real estate transactions.
We service coastal Orange County CA areas including Corona del Mar, Huntington Beach, Newport Beach, Newport Coast, Sunset Beach, Tustin and more!