The Pros and Cons To Paying Your Mortgage Off Early | Boca Raton Home Mortgages
It sounds ludicrous to not pay a loan off early. After all, in the commission of a 30-year mortgage, oftentimes more than half of the loan is paid in strict interest. However, in part to some seemingly perverse and conflicting financial incentives to the way our system is set up, it isn't always the wisest to pay off your mortgage early. There are credit, tax, and future loan considerations to take into account, along with the principal and interest of the home itself. In today's blog, we give you the pros and cons of paying your mortgage early and hope you find a way forward that best suits you.
Pro: Free Up Cash Flow
Paying off your mortgage faster means more cash in the future. Even if your mortgage is still active, you can pay down heavily in the beginning, creating a healthy habit that reduces the term of your loan, freeing up cash flow in the future. In addition, automating extra payments will ensure you build your budget around this higher number. In the event, you require a few extra bills to take care of a one-time problem, you've already been overpaying and can safely regress to the mean without losing any momentum. Now, imagine the beauty of paying down your mortgage 3, 5, or maybe 10 years early. All of that money thrown at interest is now back in your pocket for all those years to come!
Con: You Lose A Major Tax Deduction
Mortgages, and their accompanying insurance, are one of the largest expenses anyone can undertake, and in almost every case, the largest tax-deductible line item in their portfolio. In some cases, as counterintuitive as it may seem, you can benefit more from utilizing this deductible during tax season than by pocketing the extra money you'd save by paying down your mortgage early.
Pro: Save On Long Term Interest
Interest is one of the most frustrating but necessary evils to accompany loan furnishing in the United States. It is simply put, the cost of doing business with a lender, and something no one can avoid. With rates as high as they've been in decades, it's a better time than ever to look into the relationship between your mortgage, interest, and the potential tax deductions (see above.) With rates above 7%, it would be shocking to see a situation in which paying more interest by paying the minimum on your mortgage plays to your advantage. With market conditions shifting, this can always change. Be sure to work with your trusted lender and financial advisors to know the relationship between these moving parts.
Con: You May Earn More By Investing
There's a cynical adage amongst millennials, that claims a better use of one's mid-2000s college tuition would be a simple index fund investment. Monetarily, especially when considering the debt, this makes complete sense. While we can't discount the experience, nor the value of a degree to all, this same concept fits in many cases. It's possible in many cases that investing the extra funds you'd commit to your mortgage would yield more in returns than you would save your mortgage.
Pro: Shelter From Excess Debt
You may be comfortably able to pay your mortgage now, but the realities of life often happen fast, and all at once. Your "comfortability" may be wiped out by future losses from any area - whether it be medical debt, an unforeseen expense, the birth of a child, the loss of a loved one, or even an uprooting job transfer. Paying more on your mortgage now ensures protection from that debt catching up with you. As with every pro and con, it comes down to your individual situation, risk management, and future prospects. Paying more when times are good will leave you with less money today, but will also shield you from more debt tomorrow.
Con: It May Harm Your Credit Score
This one is a little ridiculous but it's true. The concept of credit itself is an unironic oxymoron. To improve your credit you often have to enter debt, but to enter debt is to decrease your credit. We've seen credit bureaus wait years to add a few points to a diligent payee, while routinely scrapping double-digit points thanks to a revolving credit account that accrued a 5% balance increase. It's a reality of life that your credit score matters, outside of the most cash-rich situations, but one that should always be held second to the money and debt you actually have.
Pro: Peace of Mind
Money: the root all evil, the cause of all our problems, and undergirds many of the problems behind our high divorce rate. Cliches aside, debt is one of the greatest stressors in life, wherever you live. Less debt = more peace. The longer your mortgage hangs over your head, the more money is wasted on interest, and the less you'll have in your pocket.
Con: Potential Prepayment Penalties
Our partner lenders can speak to this better than we can, but a penalty for prepaying your mortgage is a perverse incentive foisted upon you by financial institutions whose only reasoning is to lock you into paying more interest over time. This logic is patently absurd to you but makes plenty of sense for the financial institution that wishes to collect as much money as possible over the term of your loan. In essence, your lender is telling you without telling you, that to practice sound financial behavior and use your extra funds to pay down the loan will hurt you, because of them. Be wary of any perverse incentive to positive financial behavior, and vet every loan for this cynical tactic.
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