3 Things to Consider Before Paying Your Mortgage Off Early
A dream house is hard to come by. Choosing your perfect home, funding that purchase, and then finally settling in is a long process – from seeing that first listing to moving in that last bulky piece of furniture. Unfortunately, paying off the mortgage you took out on your dream home can take even longer – unless you make it your goal to pay off your debt early. But is that always the right choice?
Here’s what you need to know about paying off your mortgage early:
Are there penalties for paying off your loan ahead of schedule?
First of all, it’s important to know the terms of your mortgage. In some cases, there may be unforeseen advantages that come from holding your loan for the full payment period.
Your loan might have a prepayment penalty. You can actually be fined for paying off your loan early (sounds crazy, right?). Most of the time those penalties are between 2 percent and 4 percent of the mortgage, which means you might end up paying thousands of dollars on top of your mortgage. If you’re paying your mortgage off just a year or two early, you probably don’t have to worry. These penalties are usually for people who are paying the loan within five years of buying their home. If your mortgage has a low interest rate, it might have one of these penalties.
The same goes for refinancing. Remember, refinancing is just taking out a new loan to pay off your old loan. So you might be on the hook for prepayment penalties. If you end up paying thousands of dollars in penalties, refinancing might not be worth it.
So if paying off your loan early isn’t the right option for you? Try putting those extra loan payments in a high-interest savings account.
What does your other debt look like?
Stop. Put down the checkbook. Before you start paying off your mortgage early, take a close look at all your other debts.
Most of the time, paying off debt with higher interest rates is a better idea than paying off your mortgage (which is typically offered at low interest rates) early. Pay attention to the interest rates and terms on any debts you have. You might save money in the long run by paying off other loans with higher interest rates.
How long will you be in your home?
If you plan on staying in your home for a long time, paying off your mortgage might be the best option. But if you’re one job offer away from a move, you have very little to gain from paying off a mortgage early. It might make more sense to put that money toward something else.
Though it might be tempting, there’s more to paying off a mortgage early than just having the money. Take a close look at your mortgage terms and you other finances to see if it’s the right move for you. As much fun as it would be to have no monthly bill for a mortgage or rent, you might be better off with that home loan than you think you are!