Considering whether to pay off your mortgage early is a common question for many homeowners. The simplest answer? If you have the financial means, paying off your mortgage early can be a smart move.
Think of it as managing your debt-to-cash ratio. If you accumulate too much equity in your home by making extra payments, you could find yourself in a tight spot if unexpected expenses arise. It’s ironic, but being aggressive in paying down your mortgage could actually increase your financial risk.
Here are three things to consider before making extra mortgage payments:
1. Interest Rate Differential: If your mortgage rate is significantly higher than your savings rate—say, a 6% mortgage rate versus a 1.5% savings rate—it’s wise to put extra money towards your mortgage. The tax deduction from mortgage interest often cancels out the taxes on your savings interest, so paying down a mortgage with a wide interest rate differential makes sense.
2. Financial Priorities: If you don’t have better uses for your money and you’re confident about your job security, then aggressively paying down your mortgage could be a good plan. Each dollar you prepay saves you money at the rate of your mortgage interest.
3. Home Tenure: If you plan to stay in your home for less than five years, avoid pouring extra cash into paying it off. Your money becomes less liquid, and if you need to move quickly, you could find yourself financially strained.
Moreover, if you’re thinking about selling within five years, you might want to reconsider even buying a home due to transaction fees, which typically run around 5-6%.
In summary, the best strategy might be to make extra mortgage payments with funds that won’t strain your budget. If you don’t have substantial savings—at least 10% of your home’s value—it’s probably better to hold off on prepaying your mortgage.
Shopping Around for a Mortgage:
Always compare mortgage rates from multiple lenders to ensure you get the best deal possible. This could mean lower payments or the ability to negotiate better terms.
Exploring Real Estate Crowdfunding:
If you’re interested in real estate investment, consider platforms like real estate crowdfunding. These platforms offer access to commercial real estate investments across the country, historically only available to large institutional investors.
Always approach mortgage payments with a plan that suits your personal financial situation and future housing plans.
