For some homeowners, the long-term goal is to be free and clear of monthly mortgage payments as soon as possible. It’s a trend that Baby Boomers and Gen Xers have tended to pursue, especially since interest rates were much higher and more volatile in decades past. But with today’s mortgage climate and relatively stable interest rates, is becoming mortgage-free on a shorter term still the right play?
It can be a wise financial strategy for some borrowers, but clearing off your mortgage’s principal balance isn’t a goal on everyone’s radar. As it goes with many money decisions, it depends on your financial goals.
If you’re waffling between making extra mortgage payments and amortizing for as long as you’re able, this is for you. We’ve compiled pros and cons for paying off your mortgage years early to help you determine your course of action.
Pros for paying off your mortgage faster
Free up cash flow
When your debt-to-income ratio is near its maximum allowable limit, it’s easy to think that there would be more to spend on necessities if you pay off your mortgage It’s true – paying off your mortgage early will give you the combined amount of your interest and principal payment to funnel toward other purposes.
Save money on interest paid
For some borrowers, paying interest on any amount, whether mortgages or credit cards, seems like a waste. If you ‘don’t believe in paying interest’, being mortgage-free is likely something you feel deep in your bones. Especially in the first few years of a mortgage when the interest portion is highest, this is a common feeling.
No one else has financial interest in your house
For some borrowers who have experienced financial hardship in the past, there’s an inherent concern that the bank will find a reason to foreclose on your house. This can drive you to pay extra money against it with the hopes you’ll be mortgage-free sooner and the mortgage lender can’t take it from you.
Alleviate anxiety
And for others, having an extended loan term like a mortgage is a serious source of anxiety. Simply clearing the payment off the calendar forever feels like a weight off the shoulders.
Cons for paying your mortgage down early
Your money could be earning more than the interest you pay
By any standard, mortgages have historically low rates. It’s almost difficult to invest your money in a way that would yield a lower reward than the interest you’re paying on your mortgage. As a comparison, the average return on the stock market over the past decade is 9% annually, and that’s a much more conservative way to invest than high-earning areas like real estate.
Prepayment penalties
Inevitably, paying off a mortgage early comes with extra fees. The fee schedule is set by the lender, but it’s usually not an insignificant sum, especially from traditional mortgage lenders. It could be thousands of dollars you pay out of pocket for the ‘privilege’ of being mortgage-free.
The mortgage interest tax deduction vaporizes
For anyone financing a home under $750,000, the income tax deduction for mortgage interest paid is hugely beneficial. Before you pay off your mortgage early, consider if you’re willing to give up on a tax deduction you get simply for carrying a mortgage. The difference could be surprising, especially if it jumps you up a tax bracket.
Potentially limits your credit
What most borrowers often don’t consider is the benefit a mortgage plays on your credit score. With a high-value loan that’s consistently paid on time, it proves to lenders that you are trustworthy. With that account no longer open on your credit report, lenders could perceive you as a higher risk – wrongly, I might add. You could be subject to limited credit availability or higher interest rates in the future.
MBANC has your solution
Whether you’re looking to shorten your mortgage amortization or stretch it out with lower payments, MBANC has the mortgage solutions to make your financial goals a reality. Contact us today to find out how we can help you reach your goals with one of our mortgage products.