- Posted by Jeremy Bachmann
Pay off Your Mortgage Early?
For the oldest among the Boomer generation and their parents, paying off the mortgage early was a dream achievement. That generation would host mortgage burning parties to celebrate paying off their loans early and owning their homes debt free.
Boy have times changed. Younger Boomers' financial lives have become more complex than the previous generations'. And, most people from the 1960s or later grew up being comfortable with debt. As a result, there are a lot of conflicting ideas on whether paying off your mortgage ealry should be a top priority or not.
So, what's the right move today – pay off your mortgage early or don't worry about it?
The Short Answer is a Definite Maybe
It may depend on what's most important to you.
The greatest advantage to paying off your mortgage earlier is . . . peace of mind! Once you no longer owe your lender, you can sleep soundly at night knowing that you now own your home free and clear. And for many people, you can't put a price on feeling that sense of financial security and freedom.
And by shortening your home loan, you can also avoid paying potentially thousands of dollars in interest. For example, in a typical 30-year, fixed rate mortgage, the borrower will actually pay more in interest than principal over the life of the loan. By increasing your bill, you get to pay more principal earlier on. As a result, you can significantly reduce your interest payments. This will allow you to build equity faster, enabling you to own your home sooner. However, you will give up some flexibility, since cash that could be easy to access from a savings account will now be "in your house" as equity.
Consider All of Your Financial Goals and Prioritize
However, everyone's situation and priorities are different. If you are thinking about paying off your mortgage sooner than planned, either by changing to a short-term loan or sending extra payments to your lender, you may want to consider doing the following first:
- Create an Emergency Fund. Before deciding to shorten your mortgage term, many experts suggest creating a cash cushion to cover unexpected expenses, such as a burst pipe or termite invasion. The goal is not to be cash poor when paying off your mortgage early, as it's always better to be safe than sorry. Otherwise, you could find yourself borrowing more money at a much higher interest rate to handle an unforeseen financial crisis.
- Max Out Your Retirement Accounts. Whether it's a 401(k), an IRA, or some other type of account, maxing out your retirement savings should be a top priority. Putting in a substantial amount of money into your retirement fund can become even more beneficial if your employer promises to match part or all of your financial contributions.
- Save for Your Child's Education. If you have children and plan on paying part or all of their college tuition, you may want to invest in a 529 plan. Under the 529 program, you can put money into a mutual fund or similar investment, and your account will be protected from both state and local taxes.
- Pay Off Outstanding Debt. It's important that you focus on paying off all of your other debt obligations before increasing your monthly mortgage bill. Credit card debt can really add up over time, especially with interest rates reaching 14% in some cases.
Also, before you decide to switch to a short-term loan or send additional mortgage payments to the bank to payoff your mortgage early, make sure to consult with your lender to discuss the terms of your loan agreement. Some mortgage companies can actually hit you with penalties if you pay your loan off too soon!
So, What Should I Consider When Making a Decision?
For those looking to shorten a mortgage term or increase their monthly payments, make sure you have:
- An emergency fund in place
- An established retirement account
- A substantial college fund for your children
- Paid off all other outstanding credit card debts
- A stable or growing income
- Consulted your lender about pre-payment penalties