Does It Make Sense To Pay Off Your Mortgage Early?
Conventional financial wisdom says you should be hard at work paying down (and paying off) debt, but what about your mortgage? It's the biggest chunk of debt you have, so should you plan to pay it off early?
That's where conventional wisdom stops being helpful, because the answer to this depends on your personal financial situation. There are some cases in which it makes sense to get your mortgage off your plate, but mortgage debt isn't necessarily a bad thing. Let's consider your financial goals and whether paying off your mortgage could help you reach them.
Goal #1: Going debt free
While being completely debt free is a great goal, your mortgage probably isn't the debt you want to tackle first. Even though it's the biggest debt, it may have a lower interest rate than your other debts. That means it makes more sense to pay off high-interest credit card debt and student loans before looking to your mortgage.
Even if you've already paid off every other ounce of debt, you'll want to consider what else you could do with the cash you would spend on paying off your mortgage. Do you have a big enough emergency savings account to cover future hurdles? If not, building that may protect you from incurring future debt. Do you have any spending plans on the horizon that you'll need the cash for, like buying a car or going on a family vacation? If so, it might be best to hold on to your money for now.
If all of your debts are paid off and you don't need the money for anything else, then you can seriously consider whether paying off your mortgage makes sense. If you can't afford to pay it off all at once (and you probably can't), most mortgage companies will let you make extra payments towards the principle so you can whittle away at the debt more quickly.
Goal #2: Saving money
The interest you'll pay on a mortgage — is substantial. And saving on interest payments is a good reason to consider paying off your mortgage early, if you can afford it. Just remember what we talked about above: your mortgage is likely one of the lowest interest debts you have, so it should be your lowest priority to pay off.
Goal #3: Getting ready to retire
Life without a mortgage can help you make the most of a limited retirement budget, but this is another case where you need to consider what else you could be doing with your money. Depending on your interest rate, you could make more investing the money then you would save by using it to pay off your mortgage. Putting that cash into CD ladders or stocks that pay dividends could help with monthly income and help make the most of your cash. If you would like to know more about investing you should consult a financial advisor.
Goal #4: Improving your credit score
While your debt utilization — how much you owe compared to how much credit you have — does impact your credit score, having mortgage debt doesn't ruin your credit. In fact, a mortgage can even help your credit score! Part of your score is based on the types of credit you have (i.e. credit cards, student loans, mortgages), and a mortgage adds to that. Additionally, paying your mortgage on time every month helps your score, just like paying any other bill. So if your credit needs a little help, it's probably best to focus on paying down other debt and getting those mortgage payments in on time — it may take a while, but eventually your score will improve.
Goal #5: Making your home yours
Perhaps you've decided, quite simply, that this home is home. It's where you want to stay and so why not work towards owning it in the clear as quickly as possible? This isn't a bad idea, but always be sure you pay down higher interest debt first and that you won't need the money you would be throwing at your mortgage.
Goal #6: Making the best investment choice
You have a number of options for what to do with the money that you could use to pay off your mortgage. If you are not taking advantage of your 401K or other tax-advantaged investments, that may be a far better use of your funds. That is especially true if your employer has some type of matching program as that is an immediate return on your investment. If you have questions about investing you should consult a financial advisor.
Alternatively, if you're planning on moving soon, it's less likely that paying off your mortgage — perhaps just to turn around and get another one — will help your financial situation much.
Whether you want to pay your mortgage off faster or need to lower your monthly bills, refinancing your mortgage can help you do it. PenFed offers a range of refinancing options at competitive rates — apply online today!