Brought to you by: Breez DeGuzman
Owning a home is a goal to which many of us aspire. But unless you can afford to pay for a house in cash, you’ll probably have to take out a mortgage. This has scared away many a potential homeowner. And those that do go forward often view the mortgage as a necessary evil.
Debtors often consider paying off their mortgages early. This can be a good economic strategy, but there are some disadvantages to it as well. Here are some things to consider if you want to become mortgage-free.
Pros
Paying off your mortgage leaves the lender with no claim to your property. Your home is truly yours and yours alone, and you don’t have to worry about foreclosure due to the inability to make payments. You simply can’t put a price on that feeling of security.
The more quickly you pay off your mortgage, the less you will pay in interest. Any extra principal that you pay each month is that much less that you will have to pay interest on for the remainder of the mortgage term. If you consistently make extra principal payments, it could save you thousands of dollars over the life of the loan.
Once you’ve paid your mortgage in full, it’s like having several hundred dollars in extra income each month. You’ll have more money to put toward retirement, remodel your home, or spend any other way you’d like.
Being without a mortgage gives you greater freedom. You could sell your home and pay cash for another one. You could build up extra savings and pursue a new career. Having your mortgage paid off may even open the door for early retirement.
Cons
When you pay off your mortgage, you can no longer take tax deductions on the interest paid each year. For those who itemize deductions, this can cause a major change in your tax situation.
With the right investments, you could come out ahead by paying the minimum on your mortgage each month and investing the rest. If an investment offers returns greater than your mortgage interest rate, you would theoretically be better off going this route. It’s important to note, however, that most investments with higher returns are not guaranteed.
The more money you’re paying toward your mortgage, the less you’ll have for other expenses each month. You may have to put off buying a new car or saving for your children’s education. Are these things you can live with?
Putting money into your home makes it harder to access funds when you need them. If the need arises you could sell your home, but that rarely happens as quickly as you would need it to in an emergency. You could also take out a home equity loan, but that defeats the purpose of paying off your mortgage early.
Paying your mortgage off early comes with some opportunity costs. But for many homeowners, the benefits far outweigh the disadvantages. They can save money without having to be savvy investors, and they get the peace of mind that comes with being mortgage-free sooner.
With the right investments, you could come out ahead by paying the minimum on your mortgage each month and investing the rest. If an investment offers returns greater than your mortgage interest rate, you would theoretically be better off going this route. It’s important to note, however, that most investments with higher returns are not guaranteed.
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