Paying off your mortgage early is a good way to free up monthly cashflow and pay less in interest. But you'll lose your mortgage interest tax deduction, and you'd probably earn more by investing instead. Before making your decision, consider how you would use the extra money each month.
The best time to pay off a mortgage is early to avoid accruing extra interest over the years, and the same is essentially true of investing in your future. Since interest builds over time, the longer your monetary contributions are saved for your future, the more they'll be worth when it's time to use them.
What is the most significant downside of paying off your mortgage early? The biggest drawback of paying off your mortgage is reducing your liquidity. It is far easier to get money out of an investment or bank account than it is to get money from the equity you've built in your home.
While mortgage rates are currently low, they're still higher than interest rates on most types of bonds—including municipal bonds. In this situation, you'd be better off paying down the mortgage. You prioritize peace of mind: Paying off a mortgage can create one less worry and increase flexibility in retirement.
Paying off a Mortage Reduces the Cost of Interest
The longer you carry a mortgage, the more you pay in interest. By paying off your mortgage early, you may save significantly due to the additional cost of interest, especially if your home loan had a high-interest rate when you took out your mortgage.
Using one of these options to pay off your mortgage can give you a false sense of financial security. Unexpected expenses—such as medical costs, needed home repairs, or emergency travel—can destroy your financial standing if you don't have a cash reserve at the ready.
You should aim to have everything paid off, from student loans to credit card debt, by age 45, O'Leary says. “The reason I say 45 is the turning point, or in your 40s, is because think about a career: Most careers start in early 20s and end in the mid-60s,” O'Leary says.
Dave Ramsey is certainly one of America's leading voices on finance. Ramsey is averse to debt of any kind and believes you should pay off your mortgage as fast as you can. In fact, he recommends that people only take out a 15-year mortgage that is no more than ¼ of their take-home pay.
With your mortgage paid off, you do not have to send the mortgage company any more money. Send discharge of mortgage letter to your county: Your mortgage company should send all of the required documents to your county clerk's office notifying them that your home is no longer bound by a mortgage.
Consider your full financial picture, not just your debt.
Paying off a mortgage early can free up cash flow and save a lot of money on interest payments. But investors shouldn't view their mortgage in a vacuum. Putting extra money toward a mortgage can be seen as part of an overall investment plan.
The prospect of a higher return means over the long run, investing will most likely leave you with more money, potentially significantly more, than paying off your mortgage more quickly, experts say.
If your monthly mortgage payment is greater than the interest you are receiving after tax, you will be better off paying off your mortgage. If you have an interest only mortgage, overpaying on the interest will have no effect on reducing your mortgage cost or term.
Much like extra repayments, a lump sum payment can have a significant impact on the life of your home loan and the amount of money you can save. Making a lump sum payment, particularly in the early years of your loan, can have a big effect on the total interest paid on the loan.
While the average age borrowers expect to pay off their mortgage is 59, the number of survey participants who have no idea when they will pay it off at all stood at 16%. In 2019, 9% of those asked didn't know and in 2020, 11% gave this answer.
One of the pros of paying off your mortgage is that it is a guaranteed, risk-free return. One of the cons of paying off your mortgage is reduced liquidity, as it is much easier to access funds that are sitting in an investment or bank account.
Paying off your mortgage does not dramatically affect your credit score. You can get a sense of how much paying off your mortgage will impact your credit score in particular by using WalletHub's free credit score simulator. To be clear, though: You should always work to pay off any debt you owe as quickly as possible.
“If you're going to stay living in that house for the rest of your life, pay off that mortgage as soon as you possibly can,” Orman tells CNBC. Without a mortgage, you'll have more financial security in retirement, she says.
Your score is an indicator for how likely you are to pay back a loan on time. Several factors contribute to the credit score formula, and paying off debt does not positively affect all of them. Paying off debt may lower your credit score if it changes your credit mix, credit utilization or average account age.
Having accounts open with a credit card company will not hurt your credit score, but having zero balances will not prove to lenders that you are creditworthy and will repay a loan. Lenders want to make sure you repay, and that you will also pay interest.
When you pay off a loan, your credit score could be negatively affected. This is because your credit history is shortened, and roughly 10% of your score is based on how old your accounts are. If you've paid off a loan in the past few months, you may just now be seeing your score go down.
Both a 15-year and 30-year mortgage can have fixed interest rates and fixed monthly payments over the life of the loan. However, a 15-year mortgage means you will have your home paid off in 15 years rather than the full, 30-year mortgage so long as you make the required minimum monthly payments.
So, for this example you would type =PMT(. 05/12,60,200000). The formula will return $3,774. That's the monthly payment you need to make if you want to pay off your home mortgage of $200,000 at 5% over five years.
Mortgage Debt in the US
In 2019, the average American mortgage debt was $213,599. This figure increased to $215,655 or by nearly 1% (0.96%) in 2020. If we go further back, the difference is a bit higher. For example, in 2015, the average balance owed for mortgages was $184,323.