Most households have limited income. When there is a limited amount of money coming in on each paycheck, it can be very easy to have conflicting financial goals, such as:
- Gain financial independence.
- Pay off personal home.
Are you asking yourself, “Should I pay off my mortgage?” And not sure what the correct answer is? You’re not alone. For many it is a difficult decision because the “right” answer is different for everyone. Decisions are very individually tailored to your specific financial situation. Let’s talk about what could affect this decision for you and your family.
A quick note, there are two common ways to get your mortgage paid off early.
- Pay everything in one flat rate – like after receiving a stroke of luck
- Put additional payments on your mortgage. (Many homeowners pay half their mortgage payment biweekly, which is essentially an additional payment every year.)
These considerations apply regardless of your strategy.
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5 Benefits of Paying Off Your Mortgage Early
It might be in your best interest to pay off your mortgage early, especially if you are craving stability and peace of mind. Not everyone wants mortgage debt! Here are five ways you can pay off your mortgage early.
1. No more monthly payments
When your home is paid off, a monthly payment will disappear from your budget, drastically reducing your household expenses. If you spend less, your total passive income, which is required to cover your monthly expenses, would also be less. This is how you achieve financial independence faster! The money now used on the mortgage could be invested in something else later.
2. Peace of Mind
Everyone has an individual perspective on debt. Some believe in “good debt” such as student loans or owning real estate. Others could avoid debt altogether.
Your relationship with money is your own. For those looking to own their home direct – rather than owing a bank – paying off a mortgage can reduce anxiety. If you own your own home, you and your family’s life will be less affected as circumstances change, such as when things change. B. losing a job, needing to care for a loved one, etc.
The house is paid off – what now? You can always place a HELOC on the property if you want access to the cash. Sure, you would be billed 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 for and hold a property while it is being renovated and refinanced. There is money to tap into when you really need it. However, you have no active debt against your property.
This is not a recommendation to work hard to pay off your home and then put a lot of debt on it right away. However, you can now use the assets of your home smartly and conservatively for a short time to invest in a business, buy a new rental, or otherwise build your investment portfolio.
4. Past experiences
A person’s relationship with money is heavily influenced by previous experience. Past bankruptcies, job losses, income opportunities, and illness play a role in the financial decisions a person makes today.
For some, a mortgage payment is too much of a risk. They would prefer to pay off their mortgage early in the event that future job loss cuts their income. Others, looking to the future, may fear leaving their family members a mortgage if they suddenly die.
5. The personal choice to have little to no debt
This ties in with number 2, but it’s worth repeating: some people just don’t want to have large debts like a mortgage, and that’s fine!
Cons of prepaying your mortgage early (and why you might invest instead)
Before asking for a withdrawal offer, you should also consider the negative aspects. Here are three reasons someone would invest instead of getting rid of debt.
1. Your money could bring in a higher return
One of the main arguments in favor of paying off your mortgage early is to minimize the interest you pay. If it takes you longer to pay off your mortgage, you are paying the lender more interest.
But what if your investments produce a higher return than your interest rate? Not only could you cover the interest with your investments, but you could also make a profit.
2. Your money is tied up instead of available
Owning a home reduces liquidity. When things go wrong and you need money quickly, selling a home is not easy. Access to investment accounts or other money accounts is much easier.
3. Time is also a 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 is a little thought experiment that shows a way of thinking:
Adrianna’s goal is financial independence. She sells her house and moves into a rented apartment with her family. With the equity from the sale of her home, she will invest it in assets for the next 10 years. It implements a plan similar to the BRRRR strategy. After 10 years she has built up an annual passive income equal to the income from her work from her assets. Adrianna is now financially independent.
Financial independence means Adrianna has options. She can buy a house if she wants and pay the mortgage with passive income. It doesn’t matter how long it takes to pay it off as she doesn’t have to worry about losing her job as she doesn’t rely on her job for her income. She can also choose to keep working, pursue other interests like starting her own business, or just put her feet up and relax. Adrianna hasn’t paid rent for 10 years but is now financially free.
Dolores thinks financial independence is nice, but can’t imagine where to get the money for investments. It takes her the same 10 years to pay off her house. After 10 years she is mortgage free and decides that it would be good to start investing. Then she starts investing in assets. After another 10 years, she has built up an annual passive income equal to the income from her work from her assets. 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 – everything else was the same. The exercise shows two ends of the spectrum when the same two goals are pursued: home ownership and financial independence. Obviously, there is a lot of leeway between the two extremes. The correct answer for you could be somewhere in between. But at the end of the day, every dollar you make can only be applied to one or the other. You have to decide what you want to achieve.
4. Refinancing might be worth considering
It doesn’t matter if you really want to be debt free. However, if you are currently using a high percentage of your monthly income on mortgage payments and want to free up some cash, refinancing can be a good decision. When 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
Repaying your mortgage early has its advantages, but avoid these common mistakes that can affect your finances. It is a good idea to familiarize yourself with these missteps In front decide to pay your mortgage early.
Do not explicitly put additional mortgage payments on the loan amount
By making additional payments on the loan amount, you reduce the interest accrued. It saves you money and time. However, be sure to indicate that the payments will be used on your mortgage equity. Contact your mortgage lender for instructions on how to do this.
Don’t ask about prepayment penalties
Believe it or not, some lenders will punish you for repaying your loans early. Check your mortgage contract or ask your lender about prepayment penalties.
Not realizing what you have to pay for after this the mortgage is gone
There are no monthly mortgage payments, but there are other fees that you are responsible for when you own a home. Make sure you budget for them before making the decision to pay off your mortgage.
These fees can include:
- HOA fees
- Property taxes
- Homeowner insurance
- House maintenance costs
3 signs you are not ready to pay off your mortgage
Making the decision to pay off a mortgage early is a big financial decision. Even if you really do Really you may not be ready if you:
1. No savings
How is your emergency fund doing? Your retirement plan?
Most financial advisors recommend setting aside an amount of money equivalent to three to eight months of spending. Having such a fund will buy you time. In the event that you lose your job, you have several months to pursue as many solutions as you want. You can sell your home, find a new job, or sell an investment property to pay off your mortgage.
It’s also important to keep an eye on the balance of your retirement accounts. Don’t neglect your IRA because you don’t want a mortgage payment.
2. Insecure employment
If your unemployment is uncertain, reducing the liquidity of your wealth may not be the best decision. When there is a job loss, you want investment accounts or bank accounts to be resorted to instead of home equity.
3. High Yield Debt
Mortgage interest rates are relatively low compared to other types of credit. High yield debt should always Be paid off before paying more on your mortgage amount. If you have credit card debt, use the extra money to deal with it first – not your home loan.
When you have the savings to pay off your mortgage, it can be tempting to wipe them out in one fell swoop. But make sure you weigh your long-term goals – and take a close look at the potential benefits of investing. If you look at all the angles, you will find the best choice for you.
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