Should I Try To Pay Off My Mortgage Early?

Jan 31, 2023 By Susan Kelly

For homeowners, the prospect of making monthly mortgage payments for decades can be a source of anxiety. As a result, it's only reasonable to rush toward mortgage repayment. It's crucial to weigh the pros and cons before deciding to utilize a windfall, salary increase, or savings to pay down your home.

The money you save by paying off your mortgage is less than the money you could make by investing it elsewhere. If you can pay off your mortgage early, the extra peace of mind you gain may be well worth the extra money.

To What Extent May You Prepay Your Mortgage?

If you bought a house within your price range or your salary has increased over the years, you may be wondering what to do with the additional money. If you want to pay off your mortgage early, you should first talk to your lender or servicer. A prepayment penalty may apply depending on the terms of your loan.

What Is The Prepayment Penalty Rate?

As a rule, the Dodd-Frank Act forbids mortgage lenders from charging prepayment penalties on most house loans. Though Dodd-Frank has been amended in recent years, prepayment penalties are still governed by law.

Your mortgage may be the only one with a prepayment penalty that applies only during the first three years. The first two years are limited to 2%, while the third year is limited to 1%.

Thus, a prepayment penalty of up to $5,900 may be imposed by your lender if you pay off your mortgage in the second year with an outstanding loan balance of $295,000.

Prepaying Your Mortgage: What To Consider

Is Early Mortgage Payoff Better Than Other Investments?

Should you invest your money or pay down your mortgage? It's up to the individual, although investing could make more sense.

Even though mortgage rates have increased over the past year, they are still lower than the average long-term return of the stock market.

As a result, if paying off your early mortgage results in return equal to your interest rate, it is likely to be lackluster compared to the annualized return for the S&P 500, which has been roughly 10% over the past 90 years.

Is All Your Money In The Mortgage?

It's essential to consider your liquidity needs before making any drastic life changes, including paying off your home early. Because it might take several months, or even longer, to sell your home and access the proceeds, financial experts classify it as a non-liquid asset.

Client advisor warns, If you start paying down your mortgage too rapidly, you risk losing your liquidity. How liquid your business is also matters.

If You Don't Pay Your Mortgage Early, How Will You Spend The Money?

Think about what you would do with the extra cash if you didn't put it toward your mortgage early. What plans do you have for your extra money once you've paid off the mortgage?

If you have trouble keeping your money in the bank, consider using the extra funds to pay off your mortgage early. Using your mortgage as a forced savings tool may save you hundreds of dollars in interest over the life of your loan and speed up the process of building equity in your house.

Bowen advises, "the appropriate thing to do is the thing you will do." Ultimately, it is down to one's routines. If you're going to waste the money, you might as well put it toward a down payment on a property.

How Important Is Peace Of Mind?

At other times, what matters most is your mental well-being rather than your financial gain. The advantages of having a mortgage-free house go beyond what can be quantified by simple economic analysis.

For many, the prospect of retiring and living on a limited income is more manageable if they have already paid off their mortgage. Thomas, from Mission Wealth, adds, "I'm paying off my home."

"It's a relief to know I won't have to worry about it come retirement. Peace of mind and more efficient planning outweigh the occasional loss of potential profit.

Who Should Pay Off Their Mortgage?

For those who plan to retire early or remain in their houses for a long time, paying off the mortgage can be a significant financial advantage. The decision boils down to individual preference and the relative importance of the benefits and drawbacks.

Think about the tax implications and any prepayment penalty. Consider your current financial situation and whether or not it would be better to use the money toward anything else, like paying off high-interest debt.

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