Paying off debt as soon as possible is always a good thing - but does that rule apply to mortgage debt? Is making an extra payment each month to pay off the mortgage early worth it?
To be honest, it depends on your personal financial situation. Let's take a look at the pros and cons:
Pro: You Save On Interest
Making an extra payment to the principal balance of your mortgage helps save you money by lowering the amount of interest you pay. Although you can make an additional payment towards your principal at any time, this method is most effective when you first get your loan, because the principal is higher at the beginning. Hence, you are paying more in interest. That extra payment will result in saving in interest over time.
Con: Miss Out On Other Investment Opportunities
If you have the extra cash to put toward making an extra payment, that means that you have the extra cash to invest. Instead of trying to save money on your mortgage, you could make your money work for you. Consider additional contributions to your 401(k), especially when you're 10 years or more away from retiring, which can result in significant earnings - sometimes more than what you could save by paying off your mortgage early.
Pro: Peace Of Mind
Reducing monthly expenses brings peace of mind - which can be more important than money. Considering that your mortgage payment is likely your biggest expense, you can imagine how good it would feel to eliminate it early. Also, when calculating the cost of living, inflation - and what the average, fixed retirement income is - getting rid of a housing expense may become even more attractive.
Con: Reduced Liquidity
It’s important to have a portion of your net worth in liquid assets, or assets that can be converted into cash quickly such as stocks, marketable securities, mutual funds, U.S. treasuries and bonds. A house is considered a non-liquid asset because it can take months, or longer, for a homeowner to sell the property. If you start paying down your mortgage too fast you risk depleting your liquidity.
When it comes down to it, deciding to pay off your home loan early is a personalized decision. It depends on how mature your loan is, whether your extra cash would be more useful in other investments, how close you are to retiring, etc.
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