By Lee Sherman
Owning a home is something that many consider to be a rite of passage. So, if you can swing it, wouldn’t it make sense to pay your mortgage faster? Not so fast.
Paying your mortgage faster doesn’t actually lower your monthly payment. In fact, you’ll be paying more each month. Even a small amount extra can be beneficial. Instead it shortens the length of the loan and that can save you money.
The Pros
If you have enough discretionary income, you may be able to use those funds to pay down your mortgage. Alternatively, if you come into a large sum of money (let’s say through an inheritance or a bonus at work) you can use that windfall. But, even if you are able to make additional monthly payments, it will still take years to pay off the mortgage, so in the long run, it may not make financial sense. You’ll need to consider how long you plan to stay in the same house. Financial advisors suggest you have a plan that allows you to enjoy five years or more of mortgage-free living.
There are many benefits, including:
Save on interest. The interest you pay is based on your principle balance. As you pay down the loan, your principle balance is lowered and you’ll pay less interest.
Shorten the length of your mortgage term. That means fewer payments and lets you build equity in the home faster.
Lower your monthly expenses. Without a mortgage payment, you’ll have the money to travel, pursue your hobbies, or take early retirement.
Pay down other debt. The money you’ve saved can be used to pay off your credit card, student loans, or medical bills.
Improve your credit score. Paying off your mortgage early shows that you know how to manage your money and being debt-free can raise your credit score.
Achieve financial freedom. While the benefits of living a mortgage-free life are largely psychological (as human beings we like to own things), eliminating the stress associated with debt can help you live a longer, happier, and healthy life.
The Cons
Paying less interest sounds good but has a downside. Interest is tax-deductible and you will no longer have that deduction available to you. Even worse, the new tax law requires that you itemize your deductions and that may not make sense for home owners. As always, consult a tax expert because everyone’s situation is different.
While buying a home is still considered to be one of the best investments you can make and is generally less risky, paying off your loan early means you won’t have the money to invest in higher-yield opportunities that may come along (stocks, high-yield bonds).
You may not have enough money to pay off your mortgage and fund your retirement at the same time.At minimum, you should make sure you are contributing to the 401(k) offered by your employer.
With interest rates as low as they are now, it may make more sense to refinance your home so that you can lock in that rate.
Home ownership is a sure way to achieve the kind of financial independence that most people crave but you’ll want to make sure you’ve carefully considered your options. Calculators are available online or from your financial planner so you can see exactly how a small change in your monthly payment can impact your long-term financial goals.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.
