Top Factor To Consider Before Paying Off A Mortgage Early


It’s natural for anyone to get out of debt as fast as possible. This is especially true when it comes to owning a home, but what does it mean to clear your mortgage early? Are there implications if one chooses this route?

Let’s throw some numbers into the mix before we can dive into the effects of clearing your mortgage early. According to the Mortgage Bankers Association, the average amount taken out by Americans to buy homes stand at $301,200.

On the other hand, a report released by Fidelity in 2015 showed that employees have only $91,800 in their 401(k).

This means buying a home is still considered a number one priority or otherwise put, a measure of success. In fact, this is one of the factors pushing many mortgage holders to clear them as soon as possible, but at what cost?

1.      Liquidity 

After buying your home, it becomes one your most valuable assets, but let’s face it. Tapping into home’s equity can be an uphill task, especially when faced with a dire situation which requires immediate funds.

On the other hand, since you used up your savings to clear the mortgage, your financial stability hangs in the balance in the event that an emergency knocks on the door.

Rather, it’s easier to tap into liquid assets or resources which you can convert into cash fast. Examples include savings accounts and investments.

2.      Opportunity Cost 

What is the best use of the money you intend on using to prepaying your mortgage? Can it go into various earning opportunities to bring in more money? This is what opportunity cost is all about.

Using your entire savings to clear your debt may not be the best decision after all. You can put the money into savings, investments and other financial endeavors. However, you want to identify profitable investments which won’t impair your financial ability in the future.

The same report by the Mortgage Bankers Association indicate the average interest rate on a 30-year mortgage stood at 4.18% in 2015. However, keep in mind the volatility in the housing market and the difficulty in selling your home or even tapping into its equity value, especially in a poor season.

You can also choose to channel the excess funds into a 401(k). If you’re below 50 years, you can contribute up to $18,500 while for those at 50 or above can contribute $24,500. You can take advantage of these figures to secure your contribution.

3.      Mortgage is Good Debt 

It may sound counterproductive since many people believe all debts are bad. However, this is far from the truth. What they don’t know is there’re good and bad debts. The latter will lower your net worth, for example, through depreciating value. On the contrary, a good net will boost your net worth.

While owning a home can increase your net worth, if you have a high-interest mortgage, then you may want to refinance it as soon as possible. This will lower the interest rates and, in turn, the entire debt, thus giving you greater peace of mind.

4.      Years Left in the Workforce 

Are you nearing retirement? If so, then the best option would be to repay the mortgage as fast as possible. Remember, you won’t have the luxury of a salary once you retire and this can be difficult situation, especially with a debt burden.

On the other hand, if you still have many years in the workforce, then you may want to invest the money instead of putting it into mortgage repayments. If you start investing while still young, you have time to grow the investments, thus allowing you to earn huge returns than if you used up the money to clear the mortgage.

5.      Outstanding Debts 

Chances are you may have other outstanding debt apart from the mortgage all with different interest rates. Also, it’s possible that the mortgage will have lower interest rates compared to the other debt and this is because of the less risk associated with it.

Several factors affect the Interest rates including:

·         Credit score

·         Debt-to-income ratio

·         Economic factors such as inflation

Some of the debts such as student loans and credit cards have high interest rates compares to the mortgage. In this case, if you have such debts, it’s in your best interest to clear them first to avoid interest accumulation. By doing so, you’ll pay less in interests in the long term.

6.      Tax Deductions 

Mortgages can be your largest tax deduction. In fact, in some instances, homeowners may deduct their mortgage interest. However, the deductions will depend on the amount, how you’ll use the mortgage funds and the mortgage date, this is according to the IRS.

In the new tax plan, interest deductions will be on the initial $500,000 of the mortgage. For those with higher incomes, $200,000 and above, will not benefit from these deductions.

Paying your mortgage will eliminate the tax advantage. On the other hand, paying the mortgage early will

7.      Emergency Savings 

The future is unpredictable. However, you can prepare for it. With this in mind, clearing your mortgage early by tapping into your savings is a bad move because it exposes you to multiple risks. Look at this way.

What will happen after you lose your job or get into a dire situation which requires urgent funds? The most common move in such scenarios is to take a loan from urgent cash lender , for this many borrowers search with nation 21 loans or similar sites. This, in the long run, spells financial doom and restrains you from achieving financial freedom.

In that light, you’d rather continue paying the debt slowly rather than become cash-strapped in times of need.

8.      How Long You’ll Stay in the House 

If you have plans to stay in the house for a long time, then it makes financial sense to try and pay the mortgage as fast as possible compared to the opposite. 

You have two options, to pay the mortgage early or to pay it off slowly. Nevertheless, as you think of the two options, it’s important to consider real life situations. This will help you in planning a financial future, which will, in turn, help you achieve set goals.

Furthermore, consider talking to a financial advisor before moving forward with any option. If you still can’t come to a final decision, consider putting away the excess funds into a savings account. Go back to the options after three months to see whether you can come to a decision.

By doing this, you separate the funds, which will stop you from spending them.