Should You Pay Off Your Mortgage Early?

    Should I take cash from my savings and pay off my mortgage early or should I not? If you are paying a mortgage, at one time or another you have probably thought about this question, and what it would be like to pay off your mortgage. You have likely dreamed about living the life you desire, unfettered by the weight of monthly mortgage loan payment.

    As interesting as this though is it is worthy of critical analysis. Before you make a decision, take a close look at your financial options and situation to determine if it really would be wise to pay off your loan early. In some situations, it is better not to pay it off.

    Consider these reasons, both for and against, an early payoff in your situation.

    Benefits of Paying Off Your Mortgage

    1. You will save big on interest. Depending on where you are time-wise in the term of the loan, you stand to save literally thousands of dollars that you would have paid in interest over the life of your loan. These savings can make a huge difference in your finances in the long run.
    2. You won’t have the monthly stress of a house payment. This can be a great relief and will help you focus on more financial opportunities.
    3. As retirement approaches, paying your house off means you won’t have to struggle with house payments on a reduced income. The importance of this becomes clearer as you get older and near retirement.
    4. You’ll have hundreds of dollars to spend or save monthly. It is empowering to know that whether you want to take a couple more trips a year or concentrate on saving for the kids’ educations, you’ll have money to put aside for it.
    5. Your confidence about your financial situation will increase. After all, if you pay off your mortgage early, you’re likely doing something right with your budget. You have a lot to be proud of. Cheers to that!

    Why You Might Not Want To Pay Off Your Mortgage

    Taking all of the above into account, sometimes you can still come out ahead without paying off your mortgage early. A lot of people actually do not pay off their mortgage early.

    Here are some reasons why:

    1. Paying interest has its advantages. With mortgage rates being so low now, you might be paying only 3 or 4% on your mortgage. Yet you might find an investment that pays you a 10% return. So you would make more money if you used your extra funds to make a higher rate of interest from an investment rather than pay down your mortgage.
    • Bear in mind that if you are getting an income tax deduction on your mortgage interest, that interest is costing you even less overall.
    1. Keeping your dollars in hand may be wiser. Paying off your mortgage in one lump sum might not work in your best interest. Doing so doesn’t increase your net worth because you’ll have less cash.
    • Also, paying all your cash into your house means you have substantially fewer liquid dollars. You’d have to sell or refinance your house to get your cash back if you need it. It’s unwise to use all your cash to pay off your mortgage, especially if you could be earning interest on it.
    1. Avoid taking cash out of your 401(k) to pay off your house, especially if you are less than age 59-1/2 because of the extra penalty. Plus, all the money you take out is taxed at your ordinary income rate.
    2. Paying off loans with higher interest rates first makes more sense. It is smarter to pay off a higher interest debt than your mortgage, if your mortgage has a lower interest rate.

    As you can see, answering the question of whether to pay off your mortgage early or not takes some deliberation. Ensure you take into account your specific situation and the opportunities that surround you. Strive to determine how you can save or make the most money and you’ll be happy with your choice.

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