Do you ever think how wonderful it would be not to have a mortgage?
You’re not alone! Many homeowners think they would be better off if they could just get rid of that mortgage.
You may have read conflicting stories about this; some experts say keep the mortgage, while others say get it paid off as quick as you can. Who do you believe?
Interestingly, there are valid arguments for both points of view which is why you read such conflicting information. We are going to look at the pros and cons of paying off your mortgage early so that you will have the information you need to make the decision for yourself.
Remember the excitement of signing the contract for your first home? Recall the anticipation of moving day and then finally having your first meal, your first sleep in your very own house? The fact that it would be decades before you actually owned it never entered your head!
Then do you remember when you had to make the first repayment – talk about a reality hit! Only then did you realize the enormity of what you had taken on.
Unfortunately, many home-buyers over-extend themselves financially when taking out a mortgage; these days they seem to be encouraged by lenders. So, as the months and years go by, the mortgage repayment they were so confident they could manage, becomes a noose around their necks.
Is it any wonder we want to get rid of that mortgage? Let’s look at the pros of doing this.
The biggest reason for paying your mortgage out early is the money you will save in interest; this could be a five or six figure sum. If you look back to the paperwork you were so excited about signing, you will see the amortization schedule. This clearly sets out the amount of interest you’ll end up paying over the term of the loan. It frequently doubles the purchase price of the house.
Frees Up Money
One of the main reasons people want to pay out their mortgage is to free up the money that is making the monthly repayments. This is usually a sizeable sum, often up to half the household’s total income! Of course, they recommend allocating only 25% of your income to a mortgage but we all know how people love to stretch this out, so they can have a bigger house in a better neighborhood.
We dream of the things we will be able to do with those thousands of dollars each month, when we no longer have a mortgage!
Find Peace of Mind
Peace of mind is another strong motivator towards getting the mortgage paid off. In uncertain economic times, there is a lot of stress around having a mortgage. Will interest rates go up again? Will we be able to make the next repayment? Are we going to lose our home? If the mortgage is gone, these stressors no longer exist.
Now how about the cons for doing this?
The main reason given for keeping that mortgage is one of financial return. Many experts advise that you can get a higher rate of return on your money if invested wisely, rather than making additional mortgage repayments to get it paid off faster. Theoretically, this could be true but there are several variables that could affect the outcome of such a move. Keeping your mortgage gives a guaranteed 6% return on investment which compounds over the 30 year term; other investment options may be a less safe bet, with no guarantee that you will get a higher rate of return.
Save on Fees
There are often fees and charges associated with paying out a mortgage early. These differ greatly between lenders so it pays to find out what actually applies to your mortgage. This is the reason some experts recommend keeping the final mortgage payment back, until the term is up. If you want to save interest, (and let’s face it, who doesn’t?) make additional repayments during the life of the loan. When you have just a single repayment to go, don’t make it. There’ll be no penalties because, technically, you are way ahead of the repayment schedule so you won’t be defaulting.
Principle Residence or Investment Property?
Each household is different, of course, so you must make your own decisions, based on your unique situation. Seek professional advice from a financial advisor or mortgage specialist so that you have all the facts that are pertinent to your situation.
One of the biggest variants is whether you have a mortgage over your family home, in which you live, or it is on an investment property. If you are in the speculative real estate market, your situation is different again. Most mortgages cover the family home and so the investment is held until they want to move or down-size.
Another reason against paying out the mortgage early is the tax breaks that it brings. The interest on your mortgage is tax deductible if you rent your property, giving you an extra return on investment. However, the people who really benefit from this are those who are in high tax brackets; for the average home-owner, this isn’t a viable reason.
So there you have it, the pros and cons of paying off your mortgage early. Make sure you look carefully at your own situation before making the decision to get that ‘monkey on your back’ paid off sooner or not.
So, I am curious. Have you paid off your mortgage early and if so why? Or if you haven’t why not?