If you're a homeowner, you've likely thought about how to pay off your mortgage early. That bill for your home loan arrives like clockwork every month, so it only makes sense for you to devise a fast and furious plan to pay it off altogether. Imagine the freedom! Because the sooner you can pay off your mortgage, the easier it should be to handle the other bills that come with being a grown-up, right?
Well, you might be surprised to learn that shaving months—or even years—off your mortgage early is not always the best choice for everyone. It sounds crazy, but bear with us. There are the benefits and disadvantages of paying off your mortgage in full before the end date.
Pros of paying off a mortgage early
If you can swing paying your mortgage off early, there can indeed be significant savings—literally thousands of dollars that stay in your pocket if you play your cards right. That's because paying your mortgage off early reduces your long-term interest costs.
It's also good for your overall credit to show that you have less debt, and that you have the ability to manage it responsibly, even paying debt off before it's due in full.
But paying off your mortgage early can also have its drawbacks.
Cons of paying off a mortgage early
Many financial advisers are against paying off a mortgage early. Why? For one, you won't be able to take advantage of mortgage interest deductions, or the tax write-off you get from paying interest on your mortgage.
Because interest is what you're cutting by paying a mortgage early, you're also losing some of that benefit. You will not be able to take mortgage tax write-off to its fullest extent.
Another disadvantage of shoveling money into your mortgage is that the money will be become "illiquid," which means that the cash you put toward your home can't be reaccessed in an emergency.
So if you don't have enough money to both pad your savings and pay off your mortgage early, the latter may put you in a financial hole if an emergency crops up.
How to pay off your mortgage early
If you've weighed the benefits and disadvantages and actually want to get moving, these are tips to actually make it happen:
- Make a payment at the end of year once you see what extra cash you have. Specifically make the payment to the principal so it reduces the amount of interest you will pay in the future.
- Make an extra payment monthly in a separate check citing "principle" in the memo line.
- Make one-thirtieth of the payment every day to make certain no interest ever accrues.
- If you have mortgage insurance, track your loan-to-value ratio on the house and refinance once you hit 85% LTV. This could mean hundreds in savings each month which can be applied to the principle balance rather than the bank's insurance.
You can also make a plan to increase—little by little—the amount of money you put toward your loan each month, or vow to put any extra money you find yourself with (tax return, birthday money from a parent) toward your mortgage.
Want to make things even easier? You can set up automatic withdrawals with many lenders, so any extra payments are made without your having to lift a finger.