NMLS# 3151

Monday, May 12, 2014

Motivational Monday: Why you should pay off your mortgage early

Commonly, we all have the goal to live debt free one day.  However, often times, our biggest lifetime debt is our own roof over our heads.  That's why your goal should first be to pay down any credit cards, student loans, auto loans, or other non-mortgage debt you have.  Once you've done this, it's time to consider paying down your mortgage.

When is paying off your mortgage early might be a good idea

  • Your Interest Rate is High
    • Mortgage Interest Rates have become historically low in the last two years but if you are still stuck with a higher rate mortgage it is worth it pay down the balance.  For example, let's say you have an extra $500 a month that you are putting into a savings account that accrues 1%.  However, if your mortgage rate is at 5% it might make more sense to apply the money towards your mortgage payment instead.  
  • Your Remaining Low Balance is Low
    • As your loan balance is reduced your tax reduction is much less since the bulk of your monthly payment is principal rather than interest.  If your loan balance is small and you have the cash on hand, paying off your mortgage can free up extra cash each month that could be invested somewhere else for maximum potential.  
  • You Just Want To Be Debt Free
    • Don't we all? If you can afford to pay of your mortgage early than by all means go do so. However, you might want to read on before you get too excited:

When paying off your mortgage early might NOT be a good idea

  • You don't have an emergency fund
    • If it's going to take $50,000 to pay off your house and you only have exactly that amount saved, it may not be a good idea to pay off your mortgage.  At the very least, you should have least 6 months of reserves to pay all debts in case of an emergency.  We would advice only paying off your mortgage if you still have an ample savings account left over.  
  • You want to maximize your credit history and/or credit score
    • Making timely payments on your monthly debts hugely affects your credit score.  Therefore, if you don't have so great of credit you may want to keep paying on your mortgage simply for the benefit of it raising your credit score.  Mortgage payments and monthly revolving debt also affect your credit score differently so paying off your mortgage just to open up a new credit card may not be so smart either.  
In conclusion, whether you should pay off your mortgage early depends on quite a few factors.  One of the best things to do if you are insure is to call a licensed loan professional who can weight out the pros and cons for you.  

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