There's a fair amount of controversy over early mortgage plans and payments. Paying off your mortgage early comes with the psychological security of knowing you're in the clear. Mortgage debts tend to be the highest monthly payment for borrowers, and most people want to rid themselves of the financial sword of Damocles looming over head.
But that sword has a double edge, and paying off a mortgage quickly isn't always the wisest decision. Keeping a mortgage in the current housing market usually means low interest rates and favorable tax deductions.
There's no clear-cut answer to the question of paying off a loan early, but the following suggestions will serve as a guide for your personal mortgage situation.
The housing market 20 years ago was dramatically different than the market today. With interest rates hovering around 8%, quickly paying off a mortgage in 1993 made a lot of financial sense. Interest rates plummeted after the sub-prime mortgage crisis, and the playing field has changed for mortgage holders.
The low interest rates of today make mortgages "good" debt. That means you should always prioritize paying off high-interest debt quickly. The average American household carries over $15,799 in credit card debt and holds 3.5 credit cards. The average APR for these credit cards is 14.95 percent. Those large monthly mortgage payments may seem ominous, but high-interest credit cards will accrue unnecessary debt if not dealt with in a timely manner. Think percentages and interest rates when asking what debt to prioritize.
To complement low interest rates, mortgage holders receive tax deductions on their mortgage interest rates. For example, someone in the 25 percent tax bracket ($35,351 - $85,650 annual income) with a 4 percent interest rate will have around a 3 percent after-tax rate.
Also consider a regular payment plan if you haven't secured emergency funds. Life happens, and it's important to be ready for financial crises. Most experts recommend 3 to 6 months worth of salary to cover unexpected circumstances. Paying the monthly minimum on your mortgage allows you to build an adequate emergency fund. Money kept in savings accounts is liquid, while money tied up in home equity is not. When you don't have proper emergency funds you'll need to use high-interest credit cards. If you're looking for financial peace-of-mind, you'll need to save before paying off your mortgage.
The subjective feeling of financial liberation and property ownership cannot be overstated when pondering early mortgage payments. There's a huge emotional component attached to paying off a mortgage. The compounded interest surmounts to a much greater amount than the original mortgage, and paying off your mortgage early means less worry and less debt.
If you're not willing to make risky investments, then paying off your mortgage early is your best option. Paying off your mortgage means those 3-5% interest rate payments will be absolved from your monthly expenses. There's no investment that will guarantee that sort of return.
Speaking of retirement, if there's 5 years left on your mortgage, it makes sense to pay off the mortgage quickly. If you can live comfortably off social security, paying off as much debt as possible makes sense. The goal, for most, is to be debt-free by retirement. Just make sure you have the 401(k) or pension plan in place to supplement your retirement needs.
Only you know your current personal and financial situation. Your interest rates, income security, other debt and age all factor into the early mortgage payment equation.
As a rule of thumb, investing money instead of paying off your mortgage early makes mathematical sense, while paying off your mortgage quickly makes psychological sense. However, this rule only applies with low interest rates.
If you want lower interest rates and need to pay off high-priority debt, consider a VA Cash-out Refinance. The cash-out refinance allows for homeowners to take money out of their home equity and invest it. Veterans can refinance from a traditional mortgage into a VA loan if they choose. A cash-out refinance means more debt, but also "good" debt well invested.
It's a cop-out answer, but each situation is unique, and only you know your individual mortgage situation. If you have any mortgage-related questions, consult one of our loan specialists by calling 800-884-5560.