If you have a mortgage for your home then you might have considered paying it off early. Your home can be taking a large part of your income every month and the idea of having it fully paid off can seem very tempting. One of the greatest advantages of trying to pay off a mortgage early is that you will be able to pay less interest by clearing your debt far ahead of time. However, there are some bad sides to paying it off before its term.
The Downfall of Paying Off a Mortgage Early
When you are trying to clean up the debts in your life, your mortgage is certainly something that will come to the front of the picture. However, before jumping into this, you should pay attention to some of the things that can discourage you form trying to pay off a mortgage early.
The biggest issue to take into consideration is that once you pay off your home, that money is gone. This means that if anything unexpected comes up you won’t be getting it back. You can use this money to pay off a lot of smaller debts completely and it might put you in a better position financially. It’s also money that you can consider investing for a higher return later.
When Is It a Bad Idea To Pay Off a Mortgage Early?
There are three specific instances when you should reconsider your decision to pay off your mortgage.
- If you don’t have a good amount of saving built up then it may not be a smart decision for you to pay off a mortgage early. It’s important that before you go spending a large amount of money that you have an account set up in case there is an unexpected problem. For example, if you were to become injured, or lose your job, having your home paid off can help, but not as much as having living expenses on hand for several months.
- If you have other debts to pay that have a higher interest rate then you should always pay them off before you think about trying to pay off a mortgage early. In general, a mortgage payment has a pretty low rate of interest attached to it, so it shouldn’t be the first concern if you have some money to apply to debts. You should also take into consideration whether or not the interest that you are paying on your mortgage is deductible from your income taxes, as this is often the case. If any of this fits your situation, it isn’t in your best financial interest to pay your home off ahead of time.
- In addition to an emergency account, it’s extremely important to ensure that you are properly preparing for your retirement before paying off your home. If you don’t have a good retirement account set up that you are depositing at least ten percent of your income into every month, than it isn’t a good idea to add your extra money to your mortgage payoff. Put that additional money into your retirement instead.
The Best Way to Pay off a Mortgage Early
Let’s assume you are in the perfect situation. You have an emergency account set up, you have a good retirement fund going and all of your other debt looks good. In this case you are in wonderful position to pay off a mortgage early. So now, you might wonder what the best way to do this. Is it more effective to make on large payment or to add it to your debt a little at a time?
Your first step is to make sure that the lien holder of your home does not charge any kind of penalty for you paying them early. You should also check to see whether they apply the extra money to the principal amount that you owe or if they just use it to pay the next payment that you have due.
In short, the best idea, if it is feasible given these conditions, is to pay one large amount as opposed to several smaller ones because it will reduce the amount of interest that you are paying faster. However, it is a little bit riskier to it this way, just in case something else comes up in the meantime. But, of course, you should have savings set aside for just that occasion.
While removing as many debts from your life as possible is always a good idea, there are certainly some times when paying off your home should not be the first plan of attack. However, as long as you follow the guidelines of when it is appropriate, you should be able to get yourself to an even better financial standing. If you keep all of these tips in mind and make careful decisions involving your money soon you will be debt free.