Pros and Cons of Paying off a Mortgage Early

A home is often the largest asset owned by most families. Unfortunately, the mortgage associated with that asset is often the largest debt of most families. The difference between the two of course is your home equity. Home equity will steadily increase as you make your monthly mortgage payments and decrease if you take on an additional home equity loan. It will always rise and fall along with general housing prices in your area.

One way to increase your home equity more quickly is to make additional principal payments along with your regular monthly mortgage payment. Additional principal payments can rapidly increase your home equity and dramatically advance the timing of that “mortgage burning” party. For example, on a $200,000, 30 year, 6% mortgage, $100 additional principal payments will payoff that mortgage almost 5 ½ years early and avoid $49,000 in interest payments. If you also send in half of that $10,000 bonus you receive each December, the mortgage gets paid off in about 14 ½ years and you avoid $131,000 in interest payments.

There are investment gurus out there that will advise you to not pay off your mortgage. They will tell you that they can get you a higher return than 6% in other investment products, so if you have any discretionary funds, send it to them and you will come out ahead in the long run. They may be right. Only time will tell. But it is indisputable, that paying off a 6% mortgage will yield a risk-free 6% return (before taxes). The guru may promise to get you a 10% return, but I guarantee that it is not risk free. Paying off your mortgage is risk-free!

Of course, a sound financial plan typically prioritizes where discretionary funds go. Before paying off a mortgage early, you should have 6 months or more of earnings set aside in a savings account to draw on in case of emergencies. And of course you should pay off debt with higher interest rates first, such as credit cards and car loans. And taking advantage of company sponsored 401K’s is of utmost importance, especially if your employer matches your contributions. But as soon as those things are taken care of, paying of your mortgage is a prudent wealth building strategy. Plus the peace of mind that comes with owning your home free and clear is very comforting.

Should you decide that paying off your mortgage is a tactic that you wish to pursue, the ClaudiaHohlt.com team has developed a handy little tool called “The Mortgage Terminator”. It helps track those additional principal payments and provides you with an instant readout giving you your new payoff date as well as the amount of interest savings you have avoided. It is easy to use and best of all, IT’s FREE! Just respond to this email at Claudia@ClaudiaHohlt.com and it will be forward to you ASAP. My mission is “helping people on the move”. And as I’ve said before, my business is about the mission, not the commission.