Do I have to pay off my mortgage? Here’s when it makes sense

Most households have a final income. When you receive a limited amount per paycheck, it can be very easy to have conflicting financial goals, such as:

  1. Achieve financial independence.
  2. Pay off personal home.

Ask yourself, “Should I pay off my mortgage?” – and not sure what the correct answer is? You are not alone. For many, it is a difficult choice to make, as the ‘right’ answer is different for everyone. Decisions are very individually tailored to your specific financial situation. Let’s talk about what this decision could affect for you and your family.

A quick note: there are two common ways to pay off your mortgage early.

  1. Pay everything at once, like after receiving a windfall
  2. Extra repayments on your mortgage. (Many homeowners pay half of their mortgage payment every two weeks, which is basically one extra payment per year.)

These considerations apply regardless of your strategy.

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5 benefits of paying off your mortgage early

It may be in your best interest to pay off your mortgage early, especially if you desire stability and peace of mind. Not everyone wants mortgage debt! Here are five benefits of paying off your mortgage early.

1. No more monthly payments

When your house is paid off, a monthly payment disappears from your budget, drastically reducing your household expenses. With lower expenses, your total passive income needed to cover your monthly expenses would also be lower. This way you will achieve financial independence faster! The money that goes into the mortgage now can be invested in something else later.

2. Peace of mind

Everyone has an individual view of debt. Some believe in “good debt,” such as student loans or owning real estate. Others can avoid debt altogether.

Your relationship with money is your own. For those who want to own their home outright — rather than owe a bank — paying off a mortgage can ease anxiety. When you own your home, you and your family’s life will be less affected if circumstances change, such as losing a job, caring for a loved one, etc.

3. Equity

The house is paid off – now what? You can always place a HELOC on the property if you want to access the money. Sure, you’ll be charged an interest rate on your line of credit, but you won’t be charged if you don’t use it. The HELOC allows you to pay and hold a property while it is being renovated and refinanced. There are funds that you can use if you really need it. But you have no active debt on your property.

This is not a recommendation to work hard to pay off your house and then immediately put a lot of debt on it. However, you can now smartly and conservatively use your home’s equity for the short term to invest in a deal, buy a new rental home, or otherwise build your investment portfolio.

4. Past Experience

A person’s relationship with money is heavily influenced by past experiences. Past bankruptcies, job losses, income opportunities and illness play a role in the financial decisions a person makes today.

For some, paying a mortgage is too much of a risk. They prefer to pay off their mortgage early in case a future job loss reduces their income. For others looking to the future, they may fear leaving a mortgage for their relatives if they died suddenly.

5. The personal choice to have little to no debt

This ties back into #2, but it’s worth repeating: some people just don’t want to have a huge debt like a mortgage, and that’s okay!

Disadvantages of Paying Off Your Mortgage Early (and Why You Might Invest Instead)

Also, consider the negatives before asking for a payout quote. Here are three reasons someone should invest instead of ridding themselves of debt.

1. Your money can yield a higher return

An important argument for paying off your mortgage early is to minimize the interest you pay. If you take longer to pay off your mortgage, you pay more interest to the lender.

But what if your investments yield a higher return than your interest? Not only can you cover interest with your investments, but you can also make a profit.

2. Your money is tied up instead of being readily available

Owning a house downright reduces liquidity. If something goes wrong and you need money quickly, it is not easy to sell a house. Investment accounts or other cash accounts are much easier to access.

3. Time is also currency

Investments take time to grow. Whether you are buying real estate or investing in the stock market, it takes time to build real wealth.

Here’s a little thought experiment that offers a way to think about it:

Adrianna’s goal is to achieve financial independence. She sells her house and moves her family into a rented house. She takes the equity from the sale of her home and invests it in assets for the next 10 years. She is implementing a plan similar to the BRRRR strategy. After 10 years, she has built up an annual passive income from her assets that is equal to the income from her job. Adrianna is now financially independent.

Financial independence means Adrianna has options. If desired, she can buy a house and pay the mortgage with passive income. It doesn’t really matter how long it takes to pay it off because she doesn’t have to worry about losing her job because she doesn’t depend on her job for income. She may also choose to continue working, pursue other interests, such as starting her own business, or just relax. Adrianna has not earned anything financially from paying rent for ten years, but now she is financially free.

Dolores thinks financial independence would be nice, but can’t imagine where she would find the money to invest. She needs those same 10 years to pay off her house. After 10 years she is mortgage free and decides that it is good to start investing. She then starts investing in assets. After another 10 years, she has built up an annual passive income from her assets that is equal to the income from her job. Dolores is now financially free.

It took Adrianna 10 years to achieve financial independence, while it took Dolores 20 years to achieve the same goal – all else being equal. The exercise shows two ends of the spectrum, given the same two goals: home ownership and financial independence. Obviously, there’s a lot of room to bend between the two extremes. The right answer for you may be somewhere in between. But at the end of the day, every dollar you earn can only be applied to one or the other. You have to decide what you want to achieve.

4. Refinancing May Be Worth Considering

This doesn’t matter if you’re really trying to be debt free. But if you’re currently spending a high percentage of your monthly income on mortgage payments and want to free up some cash, a refinancing might be a good decision. If you’re dealing with high mortgage rates, today’s lower options can save you a ton of money on your monthly mortgage payment.

Mistakes to avoid when paying off your mortgage early

Paying off your mortgage early has its benefits, but make sure to avoid these common mistakes that can affect your finances. It’s a good idea to familiarize yourself with these missteps before decide to pay off your mortgage early.

Not explicitly putting additional mortgage payments on the principal of the loan

By making additional payments toward the principal of the loan, you reduce the amount of accrued interest. It saves you money and time. But make sure you state that the payments go to your mortgage principal. Contact your mortgage lender for instructions on how to do this.

Do not ask about prepayment fines

Believe it or not, some lenders will penalize you for paying off your loans early. Review your mortgage agreement or ask your lender about early repayment penalties.

Not recognizing what you have to pay after the mortgage is gone

The monthly mortgage payment disappears, but there are other costs that you are responsible for when you own a home. Make sure to budget for them before making the decision to pay off your mortgage.

These fees may include:

  • HOA costs
  • Property Tax
  • Insurance for homeowners
  • House maintenance costs

3 signs you’re not ready to pay off your mortgage

Paying off a mortgage early is a big financial decision. Even if you really, really you may not be ready if you:

1. No Savings

How’s your emergency fund going? Your retirement savings?

Most financial advisors recommend setting aside an amount equal to three to eight months of expenses. With such a fund you buy time. In the event that you lose your job, you have several months to pursue some solutions. You can sell your house, find a new job or sell an investment property to pay off your mortgage.

It is also important to pay attention to the balance of your retirement accounts. Don’t neglect your IRA because you don’t want a mortgage payment.

2. Precarious employment

If your unemployment is uncertain, reducing the liquidity of your assets probably isn’t the best decision. If a job loss occurs, you want investment accounts or bank accounts to fall back on instead of equity.

3. High Interest Debt

The interest on mortgages is quite low compared to other forms of credit. High-interest debt always be paid off before you pay more on your mortgage principal. If you have credit card debt, use extra money to settle that first — not your home loan.

If you have the savings to pay off your mortgage, it can be tempting to wipe it out in one fell swoop. But be sure to weigh up your long-term goals and look closely at the potential benefits of investing. By looking at all angles, you will find the best choice for you.

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