Paying off your mortgage early is a decision many homeowners contemplate; after all, the allure of being debt-free sooner and saving on interest can be mighty tempting. If you’re ready to start paying your mortgage more aggressively, you should know that not all paths to financial freedom are created equal. There are right ways – and wrong ways – to go about reducing your mortgage burden. Here we share the pros and cons of paying off your mortgage early, and some helpful tips.
The Benefits of Paying Off a Mortgage Early
- Interest savings: By paying your mortgage sooner, you can save a significant amount on interest payments throughout the life of the loan. It’s an indirect financial boost that can have a serious impact.
- Building Equity: The faster you pay down mortgage debt, the quicker you can start building equity in your home. Home equity can be a valuable asset that will provide a strong foundation for your financial future.
- Financial Freedom: Who wouldn’t sleep easier and more comfortably at night, knowing their home has been paid for in full? Without those monthly mortgage payments lurking at the beginning of each month, you’ll have more cash on hand to invest in other ventures.
You may be surprised to hear that it's not always a net positive to pay off a mortgage early. There are some additional factors to consider before you take the plunge.
Considerations Before Paying Off Your Mortgage Early
- Long-Term Opportunities: Paying off a mortgage early often means channeling a large percentage of your resources toward this goal. Before you go full-throttle, consider if there are better uses for that money from a long-term perspective. Investing in higher-yielding opportunities or aggressively funding your retirement account can potentially offer better long-term returns on investment.
- Managing Other Debt and Expenses: Unless you’re suddenly flush with cash, diverting more monthly resources toward your mortgage is not typically the best choice until you have set aside a reasonable emergency fund and are sure you can simultaneously prioritize other debts. Take a holistic view of the situation because there are some situations in which paying off a mortgage early may not actually be a net benefit.
- Tax Implications: As part of your tax planning strategy, always consult with your CPA about whether paying off your mortgage early will positively (or negatively) impact your status with the IRS, regarding deductions, property taxes, and other considerations.
Strategies for Early Mortgage Payoff
Are you determined to tackle your mortgage debt and pay it off early? When you’re ready to go full steam ahead, there are a variety of ways to do it, and some are more effective than others.
- Make Extra Principal Payments: One of the quickest and easiest ways to start making a run at early mortgage payoff is to make extra mortgage payments over the minimum due monthly, but you must state that the extra amount is intended to be applied directly to the principal. Financial institutions are free to apply it to interest unless you specifically communicate otherwise.
- Bi-Weekly Mortgage Payments: Splitting your monthly payment into bi-weekly installments results in an extra full payment each year, taking a month off the loan term each year.
- Refinance: If possible, refinance your mortgage at a lower rate, but continue making the same payments you did before, in order to pay the balance off sooner.
Is Paying Off a Mortgage Early the Right Move for You?
Just like no two humans are identical, neither are their financial landscapes. Deciding whether paying off a mortgage early is feasible effectively requires a thoughtful evaluation of your individual situation and unique financial goals. While early mortgage payoff brings benefits like interest savings and a bit more freedom each month, it’s vital to consider the bigger financial picture. This is where advice from the professionals at Myrick CPA can help you navigate the decision-making process confidently.
Contact Myrick CPA today and let us help you assess your financial situation to ensure that you’re making the right choices for your future. Learn more about tax planning and how we can help you build your personal wealth.