Many people who have a mortgage struggle to keep up with their monthly payments. But what if you're in the opposite situation? What if you have extra money to put into your mortgage and pay it off ahead of schedule?
Here are a few good reasons to knock out that home loan early.
1. You'll save money on interest
The less time it takes you to pay off your mortgage, the less money you'll spend on interest -- it's that simple. If you have cash on hand, it could make sense to pay off your mortgage, especially if you're paying a lot of interest on that home loan.
Imagine you take out a 30-year mortgage for $160,000 with an interest rate of 4.5%. Let's say you pay an extra $500 toward that loan every month. You'd knock out that loan in roughly 14 years instead of 30. And you'd save yourself about $77,500 in interest.
That's a lot of money to pocket for yourself instead of paying it to your lender.
2. You'll free up money for other purposes
The sooner you get rid of your mortgage payment, the more flexibility you'll have to take on other expenses. These might be things that you feel compelled to cut back on while you have that loan hanging over your head.
For example, your dream might be to buy a boat. But you might not feel comfortable bearing that expense while juggling it with a mortgage. The sooner you knock out that home loan, the sooner you'll be able to spend your earnings in other ways.
3. You'll have one less thing to worry about in retirement
Paying off your mortgage early ensures that you don't carry it with you into retirement. And that's important because once you retire and move to a fixed income, any debt could make it difficult to manage your money.
If you pay off your mortgage ahead of schedule, you won't have to bear that stress when you're older.
4. You'll enjoy the peace of mind of being one step closer to debt-free
Some people just don't like the idea of owing money. If you're one of them, that's reason enough to pay off your mortgage early. Especially if it's the only debt you're carrying.
Be careful when paying off your mortgage early
There are plenty of good reasons to knock out your housing debt early, but before you do, ask yourself whether you can really afford it. You might think you can swing an extra few hundred dollars a month on your mortgage payment. But if that's causing you to skimp on retirement savings or your kids' college funds, it may not be worth it.
Also, think about the interest rate you're paying on your mortgage. Compare it to the return you might get by investing your extra money elsewhere, whether in stocks, bonds, or a rental property. If your mortgage interest rate is low, you could invest in something with a higher rate of return than what you'd save with extra payments.
Also, it's okay to use extra money from your earnings to pay off your mortgage early or even to dip into your savings. But don't make the mistake of emptying your savings completely to knock out that home loan.
You need money on hand for emergencies. If you empty your savings account to pay off your mortgage so you can save money on the interest, you may find yourself forced to rack up credit card debt to pay for unplanned bills. And then you're on the hook for even more interest.
One final thing: If you don’t want to carry housing debt for a long time, consider getting a 15-year mortgage and paying it off on schedule rather than getting a 30-year mortgage that you pay off early. You’ll likely snag a much lower interest rate on a 15-year loan to begin with, so if you’re planning on an early payoff, it’s an option worth exploring.