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Should You Be Paying Off Your Mortgage Early?

Paying Off Your Mortgage Early

Owning a home is frequently equated with having a mortgage loom large over the head for years. Thus, the apparent path that many people would want to take is to pay off that mortgage as quickly as possible. But is paying off your mortgage early really the right decision for you to take? Read on to know the answer to this question, and before that, don't forget to click here.

Will your other investments beat paying off an early mortgage? 

The most significant consideration you have is to either pay off the mortgage or get the money invested. What will happen if you invest the cash somewhere else rather than paying off the mortgage early? Going by simple calculations, you'll see that it is always better to invest your money instead of using it to clear your mortgage.

Now, mortgage rates are much lower than what they have been in recent years. So, when you get returns equal to the interest rate by paying off the mortgage early, this return will not be as great as the annualized return you get for S&P 500, which is roughly ten percent in the last ninety years.

You could utilize the funds much better if you used them to pay off the mortgage and leverage it to purchase cash flow-positive properties. A good option would be single-family homes or multi-family real estate properties, which contain the capacity to provide high long-term returns.

However, all choices have a risk factor. For example, even when you pay off the mortgage early, prices can plunge in real estate, and you can expect a noticeable loss. So you'll need to be careful in considering the risks that you are okay to take. It'll be better not to pay off the mortgage early.

The fact remains that there is no guarantee on any investment. For example, you can invest a lot of cash in the share market and lose it. You might also put the money in real estate, and it still fails to perform as much as you hoped it would be.

Will the mortgage tie up all the cash you have? 

Before taking a significant chunk of the wealth and utilizing it for paying off the mortgage early, stop and consider the liquidity. A house is a non-liquid asset as it can take longer than a couple of months to sell your property and gain access to the capital.

When you begin paying the mortgage too quickly, you might end up depleting the liquidity. But, on the other hand, your liquidity is significant, too. So now, a viable approach would be to have emergency funds, mutual funds, bonds, U.S. Treasuries, marketable securities, and stocks available in taxable investment accounts. This way, along with having the money locked up in the tax-benefitted retirement accounts and homes, you will still contain some investments and liquid cash that can be easily converted into cash when you need it.

It helps to maintain a safe cushion that keeps you secure for a minimum of six months before you start to consider utilizing a major part of the liquidity for retiring your mortgage early.

How do you plan to use your money when you do not pay off the mortgage early? 

You need to be realistic regarding what you want to do with the money when you don't want to pay off the mortgage early. After you pay off the mortgage, would you use that to move ahead?

For instance, it may make sense to use the money to pay off the mortgage early when you find it hard to keep the money in your bank. The property might be a tool to save forcibly, and making additional mortgage payments might get you to save thousands of bucks in interest. Plus, you get to build equity in the property quickly.

Keep in mind that it all depends on your habits. If you think that you will needlessly spend the additional cash anyway, then it is better to keep it locked up into the property than to spend it.

What about your peace of mind? 

At times, it is a matter of your peace of mind rather than the bottom line. For example, owning your home clear and free can offer benefits that cannot be measured solely in financial terms. As such, many people believe that eliminating monthly mortgage payments before retirement can help provide mental relief when it comes to living on a fixed income.

There is no denying that it feels relieving to pay off your mortgage before your retirement. Though it might not make much sense financially all the time, the peace of mind it gets you is undeniable, and that lets you budget better in going ahead.

Another significant advantage is the capability to borrow against your home's equity. Getting a significant amount of equity lets you establish a HELOC (Home Equity Line of Credit), provide a reliable source of emergency income, and allow you to make essential home improvements or make steady progress towards your other financial goals.

Benefits of paying off the mortgage early 

  • Eliminate the monthly mortgage payment, and free up useful cash flows, especially at the time of retirement
  • It helps to save thousands of dollars worth of money on interest
  • Ability to get a predictable rate of returns, which is equal to the interest on the balance you are paying off
  • It gets you peace of mind by letting you own your home straight away
  • It helps to tap the equity in the home in case you require the money later on

Disadvantages of paying off the mortgage early 

  • It ties up the liquidity in-home and makes it hard for you to spend money
  • Might miss out on higher returns from any other investment
  • Not eligible for federal mortgage interest rate tax deductions
  • The potential risks that exist in investing the money in stock market

Endnote 

All the pros and cons of paying off your mortgage early have been discussed in detail already. It is time now for you to decide on the most viable route to take for you.

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