Almost every homeowner dreams of the day when they can own their house outright. With this dream in mind, paying off your mortgage ahead of schedule can seem like the best financial option. You get the home loan off your books ahead of schedule and save money on interest. If you do plan to pay off your mortgage early, though, there are a few potential risks that you should carefully assess before you do so.
Paying Off A Mortgage 101
There are a few key tactics that you can use to pay off your mortgage ahead of time. One of the simplest methods is to simply pay more than your normal monthly payment. You can pay more by sending additional payments or by simply increasing your monthly payment. Before you implement this simple strategy, be sure that you won't be charged additional fees by your lender (Figure charges no early repayment fees for either mortgage or HELOC loans).
An alternative to paying your mortgage ahead of time is to refinance your loan. In the course of refinancing, you often can switch from a 30-year mortgage to a 15-year or even 10-year mortgage. Generally speaking, shorter-term loans will have lower interest rates and higher monthly payments. You will need to carefully assess your monthly income to ensure that you can afford the additional monthly costs.
Finally, before you contemplate paying off your mortgage ahead of time, you should carefully consider what else you could do with that money. For example, excellent investment opportunities may offer you a greater return than the interest you could save by investing your cash into paying off your mortgage early. These are a few of the considerations in order to determine if and when you should pay off your mortgage ahead of time.
3 Mistakes To Avoid When Paying Off Your Mortgage Early
Paying off your mortgage early can have numerous cost-saving benefits; however, here are a few potential risks that you will need to carefully consider before you make any decision:
- Not Asking About Prepayment Penalties -- Some mortgage lenders charge a prepayment penalty if you decide to pay the mortgage ahead of time. This penalty often is equal to a set number of monthly interest payments. In some cases, the penalty is a percentage of the original mortgage loan. For example, if you have a $300K mortgage and the prepayment penalty is 5% of the original loan, then you would owe an additional $15K simply for paying your mortgage ahead of time. In this way, sometimes paying for your mortgage early can actually cost you money. Not all lenders have these fees--Figure, for example, charges no fees for prepayment.
- Leaving Yourself In A "Cash Poor" State -- If you have to use every single dollar to pay off your mortgage early, you could quickly discover that you don’t have enough money for daily needs or unexpected expenses. Being cash-poor is especially risky when you don't have an emergency fund. As a general rule of thumb, you should have up to six months of living expenses in your emergency fund before you even think about emptying your savings to pay off your mortgage ahead of time. If you don't have the funds needed to cover your monthly expenses, then you could quickly join the millions of U.S. homeowners who have to take out personal loans and run up credit card debt, paying an average of $6,225 more in interest.
- Putting Your Money Toward The Wrong Portion Of Your Mortgage -- Did you know that if you increase your monthly mortgage payment by $450, you might not pay off your mortgage any faster? That’s because the extra money may simply be chipping away at the interest you owe on the loan. If you want to pay off your mortgage more quickly, you need to tell the lender that you want to apply the additional funds to the principal. The good news is that by properly allocating your funds to paying the principal and by implementing proven debt consolidation tactics, you can enjoy the financial benefits of paying your mortgage early without going into further debt.
Avoiding the above three risks can help you to pay off your mortgage ahead of time without unforeseen negative consequences.
The Bottom Line: Make The Right Choice For Your Unique Financial Needs
Only you can determine if you should pay off your mortgage ahead of time. Your decision whether to pay off your mortgage or keep the status quo will depend on the amount of money that you have to spare, alternative financial solutions, and other unique factors. With the help of Figure, you can tap into the equity of your home, make the most of your finances, and enjoy a simpler mortgage-refinancing solution.