Should you pay off your mortgage early?
In certain circumstances, it is a good idea to pay off your mortgage. However, there are times when it’s better to not pay off a mortgage. Extra cash can be spent on other financial strategies, including creating an emergency fund, investing in the stock market, or paying-down high-interest debt.
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Advantages of paying off your mortgage early
There are several advantages associated with paying off a mortgage early:
- Home ownership. The quickest path to full home ownership is to pay off your mortgage. You’ll have the benefit of equity, so if you need to borrow money in the future getting a home equity loan is an easy option.
- No more mortgage payments. Eliminating mortgage payments frees up money that can be used for other expenses, such as home renovations, paying down high-interest debt, or building your retirement account.
- Save money on interest. Each monthly mortgage payment includes interest on the loan, which can add up to thousands of dollars a year that you could be saving.
- Peace of mind. Not having to make mortgage payments and the ability to put money toward other uses gives many people a sense of comfort and peace of mind.
Disadvantages of paying off your mortgage early
While paying off your mortgage early sounds like a good idea, there are some disadvantages to be aware of:
- Other investments may offer a greater return. Depending on your mortgage loan interest rate and the economic climate, growing your money in investments could be a better financial move than paying off your mortgage.
- Mortgage prepayment penalties. Some lenders and loan servicing company may charge a pre-payment penalty (i.e., fee) if the mortgage is paid off before the end of the specific loan term. According to the IRS, if you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty isn't for a specific service performed or cost incurred in connection with your mortgage loan.
- No longer qualify for mortgage tax deduction. According to the IRS, if you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you will generally receive a Form 1098 or a similar statement from the mortgage holder. In most cases this mortgage interest should be reported and is tax deductible. Once a mortgage is paid off there is no longer any mortgage interest to deduct. Before deciding to pay off your mortgage we recommend speaking to a tax professional to see how eliminating this deduction would affect your financial situation.
- Credit score may go down. In creating a person’s credit score, FICO, the most widely used credit score takes into consideration the types of credit (e.g., loans and debt), you have. Having a diverse mix of credit types can actually increase your score. Once the mortgage is paid off, you could see a small decrease in credit score. Of course, this would depend on your unique credit profile.
- Harder to save for retirement. Using your available funds to pay off the mortgage could leave you with less money to save and invest in a retirement account. If your employer matches retirement funds, it could be better to assign more of your paycheck to retirement savings.
- Can't save for an emergency or other unexpected expense. Having extra money in your bank account for emergencies and general living expenses should always be a priority over paying off a mortgage.
If you’re still not sure, talk to a financial advisor about mortgage payoff advice.
Alternatives to paying off your mortgage early
Many homeowners ask, is it better to pay off mortgage or save money? That depends on your personal financial situation. If you need to save money, here are some ways to improve your financial situation:
- Mortgage refinancing. Consider refinancing your mortgage to a lower rate and/or a shorter loan term. You may also qualify to get cash out at closing, which you can use to pay down high interest debt. CU SoCal can help you run the numbers to see if this option makes sense. Use this refinance calculator to see how much you can save.
- Invest. Many people choose to grow their money through investing, whether in stocks or low-risk financial instruments such as bonds.
- Contribute more to retirement savings. Retirement savings can grow quickly, especially if you can benefit from employer matching. You may also be interested in target year retirement funds that provide an investment strategy for people who know when they’ll be retiring.
- Create a college fund for your children. If you have children, putting aside money now can help off-set the cost of college tuition.
- Create an emergency fund. Emergencies such as job loss and illness can occur at any time, and having money set aside should be prioritized. Financial experts recommend that everyone have enough money saved to cover three to six months of living expenses.
- Pay down or eliminate debt. One of the best uses of any extra funds you may have would be paying off or paying down high interest debt, related to credit cards and student loans.
How to pay off your mortgage early
Here are some strategies that will free up cash that can then be used to pay off your mortgage early:
- Make extra monthly payments
- Make one large payment per year
- Reduce unnecessary spending
- Refinance your mortgage
- Consider selling your current home and buying a smaller home
- Recast your mortgage
- Get a home loan modification
- Rent out extra space in your house
Learn more about how to pay off your mortgage early.
Is paying off your mortgage really worth it?
The answer is: it depends. If you have ample emergency savings and retirement savings already set aside, and you are near the end of your mortgage term, then it could be the right time to pay off your mortgage. One strategy to pay off your mortgage would be to start making an extra payment each month or designating extra money toward paying down the principal balance.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
Get Started on Your Mortage Today!