If you have reached a point in your life when paying off your mortgage early is an option, then congratulations. This means that you have built yourself a nice nest egg, you have paid off all of your other debts, and now you have enough extra cash to pay off your mortgage early.
However, mortgages are actually quite tricky. You need to check all of your options before diving in headfirst to pay off your loan. In some cases, it might be more beneficial for you to invest your extra money rather than paying off your mortgage early. In this article, we will review four things to consider before paying off your mortgage.
Consideration 1: Did you Read the Fine Print?
When a bank loans you money to buy a house they really only have one goal in mind: to make money off of the loan they give you. A bank’s number one method of making money is to charge interest on the money that they lend you in the first place. For this reason, some banks have a prepayment penalty.
In essence, the prepayment penalty is a term of your loan that ensures the bank will make their money one way or the other. It is a penalty for paying off a mortgage early. You need to read the fine print to make sure that the prepayment penalty (if there is one) will not wind up costing you more money in the long-run.
Consideration 2: What Will You Have Left?
Before you pay off your mortgage early, you should ensure that you are not going to be left cash poor. You never know when an emergency is going to pop up that requires immediate attention. You should always have some cash tucked away to help you with unexpected expenses and if paying off your mortgage will deplete the cash pile, then it probably is not your best bet.
Consideration 3: Are you really saving money?
If you are trying to pay off your mortgage early by making extra cash payments each month, then you need to specify that those payments are for your principal. Many banks will automatically apply extra payments toward the interest for the next month, be sure that your bank does not do that so you benefit from the savings.
Consideration 4: Is Investment Smarter?
In a lot of cases, investing the number amount that you are thinking of using to pay your mortgage off earlier might actually earn you more money than you will save. In this event, it would be smarter to invest the cash rather than use it to pay down your mortgage. If you are in doubt, call a financial advisor for advice.
There are plenty of reasons that paying off your mortgage early might be an appealing concept for you. However, if you are considering doing so then you should also consider the ways in which it might be detrimental. Just be sure to research and consider all of the options before you make the decision to pay it off early.