Should You Pay Off Your Mortgage Early?
Is it best to pay off your mortgage rapidly or put excess money into investments?
Along with paying off high-interest debt, putting money away for retirement, and establishing an emergency fund, paying off the mortgage is a big homeowner priority. It can be exciting to own the home outright and not have to worry about monthly payments moving forward.
However, there are two different perspectives on the issue, both of which are reasonable. And especially in today’s market, there is a third option that is often ideal.
Option #1. Don’t rush to pay off your mortgage. The interest is tax-deductible, and you can redirect your excess money to investments and generate more money (due to higher interest) than you are losing in mortgage interest (which is historically low).
Option #2. Always get rid of debt as quickly as possible. If you go that direction, your return is guaranteed to be equal to the mortgage interest rate.
Alternative: You can get a really low rate with a mortgage refinance in today’s market.
What are today’s rates?
Is refinancing a good idea for you? While your existing mortgage and financial situation will inform the answer, the current average market rates are also a key factor.
Rates have been rising gradually but are still incredibly low and just dropped week-to-week in the Freddie Mac Primary Mortgage Market Survey (PMMS). The 30-year fixed-rate mortgage was at 3.09 percent, 15-year fixed-rate mortgage was at 2.35 percent, and 5/1-year adjustable-rate mortgage was at 2.54 percent.
Pro & cons of paying off your mortgage early
We will get back to the notion of refinancing. Simply looking at paying off a mortgage versus not in a little more detail, here are the pros:
Pro #1. You own the home. You cannot lose it. You no longer need to know you have a mortgage payment each month to protect against the possibility of foreclosure.
Pro #2. You do not need to pay each month. Even if foreclosure is not a concern, leaving the payments behind means you have cashflow for college funds or investments.
Pro #3. You do not lose as much to interest. If you can reduce the number of mortgage payments you make, you can reduce the amount of interest you pay over the life of the loan. You want all extra funds to go toward principal. Communicate that to your lender.
Pro #4. You can be freed from the stress. You may want to get rid of the mortgage simply because it has emotional weight, and you want to set aside its sense of burden.
Primary cons are as follows:
Con #1. Your credit score drops. Your credit score will drop a little bit if you remove a credit type (such as a mortgage).
Con #2. You can no longer deduct mortgage interest. If you pay off the mortgage, you can no longer reduce your taxable income with the mortgage interest deduction.
Con #3. Put your money into investments. The average return on stocks is approximately 9 percent. Since mortgage rates are near 3 percent, you can fare much better (on average) by investing the money.
Con #4. You may incur penalties. Finally, your mortgage may charge prepayment penalties if you pay it off early, refinance, or sell within three to five years of initial closing.
Does refinancing make sense?
Refinancing could be a very smart route if want to leverage your equity. You can free up money by lowering your payments and minimizing your interest rate. You can then invest the excess however you choose.
Refinancing is often the best option, even if you have done so previously. Rates remain near the all-time fifty-year low tracked in the PMMS. However, every situation is unique. Explore your options.