Mortgages represent the most common type of personal debt in the United States. Why? Because when you take out a mortgage loan, depending on the type of mortgage, you generally finance 80% of the price of the house. But the total cost of a mortgage is not just the actual price of a home, it includes the interest you pay on the loan itself.
For example, if you take out a 30-year fixed home loan, you can plan to send a payment (covering both your principal, interest, and homeowners insurance) to your lender for the next three decades, unless you decide to pay off your early mortgage.
Getting out of your mortgage, if you can afford it, can offer benefits that can positively impact your finances as well as your quality of life, especially in retirement.
Here are four reasons to consider whether paying off your mortgage early is beneficial to your long-term financial prospects.
- Paying your mortgage early could free up your cash for travel, retirement, or other long-term plans.
- Being mortgage-free can protect you from losing your home if you run into financial difficulties.
- The accrued interest on a home loan can run into the tens of thousands of dollars over the life of the mortgage.
1. Address other debts
One of the biggest benefits of paying off a mortgage is having more long-term financial security. Without the burden of a mortgage to pay every month, you may have some extra breathing space in your budget.
If you were having trouble paying your bills before your mortgage was paid off, you can redistribute the money you would have paid on your mortgage toward high utility bills, credit card balances, college loans, and other types of debt.
2. Paying off a mortgage reduces the cost of interest
A large financial liability that homeowners face when applying for a mortgage is the high cost of interest on the loan. The longer you have a mortgage, the more interest you pay.
By paying off your mortgage early, you can save significantly due to the added cost of interest, especially if your home loan had a high interest rate when you took out your mortgage.
3. Protection during volatile housing markets
One of the main concerns for many homeowners, especially if they remember the Great Recession, is the impact that a volatile housing market can have on homeowners. Being able to keep up with your mortgage payments during a large-scale financial crisis is a real concern for many homeowners.
For example, if you suddenly need cash and want to take equity out of your home, it can be difficult to do so if your home’s value drops due to a volatile market.
But if you’ve paid off your mortgage, at least that monthly financial burden is removed and you can wait for your home’s market value to improve.
Some financial experts caution that you should not sacrifice your retirement to pay your mortgage. If you are retired, it can be helpful to weigh the pros and cons of paying off a mortgage versus increasing your retirement accounts.
4. Financial freedom to start other companies
A nice advantage of paying your mortgage, assuming you have no other debt, is that it can give you the financial freedom to start other ventures.
Whether you’ve always dreamed of living somewhere tropical, traveling the world, or owning your own business, having extra money in your bank account every month will allow you to pursue other economic opportunities.
The bottom line
Paying a mortgage is a dream for many homeowners. If this goal is within reach for you and your family, it could be a smart move to meet your mortgage balance.
Not only will it free up extra money each month, but it also provides additional financial security during a housing crisis, allows you to save more, and may even allow you to pursue your dreams that need additional financial support.