The Pros and Cons of Paying off Your Mortgage Early
Your mortgage is one of the largest types of debt that you have going right now. If you’re not careful, it can bury you alive. However, what happens if you actually run into a time in your life where you have the ability to pay your mortgage off early. That’s when you really need to stop and think about the pros and cons of paying of your mortgage early. You don’t want to end up not taking advantage of the opportunity, but at the same time you will need to make sure that it’s actually an opportunity that you can take advantage of.
Do you know the difference? Let’s look at it a little bit deeper.
First and foremost, you will want to make sure that you bring up the original mortgage contract that you signed. If you don’t have it in your records, you should call your mortgage company. Don’t just let the representative on the phone tell you what you remortgage says. Ask for a copy of the original document that you signed. Trust us — they will definitely have a copy of what you actually signed. Make sure that you look and determine what your contract really says. What you’re looking for is what’s referred to as a prepayment penalty. If you aren’t careful, you can end up paying big money for paying off your mortgage early. Now, you might wonder why your lender would make you pay extra to pay off your mortgage. Remember that you have an interest rate attached to your mortgage. Every month that you pay your lender, you are paying a mix of interest and principal, which matches your amortization schedule. If you pay the loan off early, then that will become lost income to the lender. The prepayment penalty is what helps compensate the lender for this event.
Some people pay off their mortgage early anyway, because they would rather have the peace of mind that comes from knowing that you will never have to pay for a mortgage again — unless you buy another house. In addition, if you pay off your house early, you can usually qualify for a home equity loan or a home equity line of credit. This would let you tap the equity in your home for a variety of different things, like home improvement.
Once taken out, home equity loans usually have an early repayment charge for the duration of the initial tracker or fixed rate period. This could be 2,3 or 5 years depending upon the product selected. However, once this period has expired then any early repayment charge will cease & the mortgage can be repaid in full, with no penalty. Therefore, the timing of the repayment is essential.
Ultimately, you will nee dot weigh the pros and cons as they work out for you and your family. Some families get the extra money form an inheritance, and naturally think about their home as one of the biggest investments — and debts — that they have on the table. If you want to see it from that direction, then you can definitely do so. On the other hand, if you have that type of money to throw around, it can be better to invest it into current instruments that have a higher yield. It just depends on whether or not you need the current income or not.
There will come a point in your life where you can make extra payments too — for example, you might move into an industry that has a huge signing bonus. That could be a lot of extra monthly payments, which would also make the months that you don’t pay the mortgage very lucrative from a cash flow standpoint. It can be the chance you get to take a vacation, or to put money away in savings for college or retirement — two very important events.
Can it be worthwhile to pay off your home? Yes, it can. However, there’s one final point that you will need to think about: your credit score. While you will be removing the debt, the truth is that paying a debt on time is just as important. If you need to build your credit, you might want to leave the mortgage on there so that creditors can see that you know how to pay your debts over the long run. This can help maintain and even stabilize your credit score — wild swings can look just as bad as a “low” credit score.
As you can see, the choice to pay off your mortgage is actually not something that should be made lightly. With a little planning, you shouldn’t have any trouble at all getting things done either way — why not start today?