Is Paying off your Mortgage Early a Good Investment?
Considering paying off your mortgage early? The fact that you have extra cash flow or savings to apply towards the mortgage should be applauded. Any extra amount that you pay towards the principal is an investment — But is it a good investment?
Without question, making extra payments on your mortgage can save you tens of thousands of dollars in interest over the life of the loan. Home owners making extra mortgage payments get a return on investment equal to the mortgage interest rate (minus any tax deductions). If you compare that to the current environment for money market accounts, savings accounts, CDs, etc. that pay less than 1% interest, the trade off of paying off mortgage interest can offer a decent return depending on mortgage interest rates.
Regardless of where a home owner is in their mortgage life cycle, there is still room to benefit from paying off your mortgage early. Any extra payment above and beyond the scheduled principal and interest payment will go directly toward paying off their principal. *It’s always a good idea to specify that extra payments are to go towards principal. Otherwise, a loan servicer may apply towards your escrow balance.
Advantages to Paying Off Your Mortgage Early
- Eliminate interest and receive guaranteed rate of return (equal to interest rate after tax deductions)
- Financial flexibility to save money by eliminating a hefty principal and interest payment
- Own your home ‘free & clear’ – hold clear title to your home
- Build a legacy to pass on a property without liability (other than property taxes)
While many home owners make paying of their mortgage an ultimate goal, is it the best use of your extra money or cash flow or savings?
Disadvantages to Paying Off Your Mortgage Early
In some cases, paying off the mortgage balance early is the best strategy to help reach financial goals. For most other families and individuals, there may be other places that their extra money or cash flow should be directed (ie. retirement planning, children’s college savings, credit card or auto debt…). A heart-to-heart with your financial team (CPA, financial advisor) may be in order. There will always be an opportunity cost for a financial decision. Extra principal payments are no different:
- Pay more taxes – Lose tax write-off of mortgage interest deduction
- Trapped equity – no mortgage, but no money unless the house is sold or can still qualify for cash-out loan
- Home appreciates the same amount, regardless of mortgage balance
- Other assets lose out – is retirement and your nest egg where it needs to be?
Every situation is different and each individual is unique. There may not be a “right” answer, but the drive behind this kind of thinking can shape future decisions.
If paying off your mortgage early is something you are considering, we’re happy to be a resource for you or that forward-thinking person in your life.
Contact us today or call directly to speak to our team of mortgage planning professionals, 972-499-0454.