Should you pay off your mortgage early?
A common dilemma faced by homeowners is whether to pay down the mortgage early. Wouldn’t it be great to burn your mortgage and enjoy financial freedom sooner? Paying off your mortgage makes sense in many cases, but not always. For instance, if you’re carrying high-interest debt, such as payday loans or credit card debt, concentrate on paying that off first. But if you’re clear of this sort of debt, it may be a viable option.
Here are four reasons you should consider paying off your mortgage early.
Save on interest
If you’re like most people, you won’t be able to afford to purchase your home outright in cash; you’ll need a mortgage from the bank. While a mortgage helps you get your foot in the door of the real estate market, the interest can prove costly. The interest over the life of your mortgage can mean you’re paying almost twice your home’s original purchase price.
To save on interest, you can make mortgage prepayments. Common prepayments include increasing your payment, doubling it up and making lump sum payments. Normally when you make a mortgage payment, a portion of it goes towards interest and principal, but when you make prepayments, the entire amount goes toward principal. This can help you save thousands in interest over the life of your mortgage, and pay it off years sooner.
It’s a guaranteed rate of return
A common argument against paying down your mortgage early is that you can get a higher rate of return by investing. (I address this in my upcoming book, Burn Your Mortgage.) While that may be true, there’s no guarantee. The equity market can be very volatile. Who’s to say there isn’t going to be another financial crisis next year?
That’s why I prefer the guaranteed rate of return that mortgages offer. When you pay down your mortgage, you know exactly what your rate of return is going to be: your mortgage rate. When you invest in stocks, ETFs and mutual funds, your rate of return is unknown. Besides, if you’re anything like me, you may prefer the peace of mind that paying down your mortgage offers.
To protect yourself from rising rates
With interest rates near a record low, many of us are using it as an excuse to load up on debt. Debt has never been cheaper, but it hasn’t always been this way. When interest rates eventually rise, the debt you’re carrying will be a lot more expensive. Instead of using low interest rates as an excuse to pile on more debt, why not use them as an opportunity to pay down the single largest debt of your lifetime: your mortgage? By paying down your mortgage while rates are low, you can save thousands in interest over the life of your mortgage.
To achieve financial freedom
A paid off home is the foundation of financial freedom. With your home paid off, you can finally afford to live the lifestyle you’ve always dreamed off. You can travel the world, write a book, volunteer or take a less stressful job. The possibilities are endless! Financial freedom is many things to many people, but the bottom line is that it gives you choices.