Increasing your home loan payments may seem logical, but before paying off a mortgage, there are several things to take into consideration. The typical mortgage has a 30-year term. Spreading payments over three decades puts home ownership within reach for many people. However, you might frown at the idea of a 30-year mortgage. And if you have extra cash, you might increase your home loan payments to eliminate the mortgage sooner. However, before paying off a mortgage, consider the following.
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1. Do You Need the Mortgage Deduction?
Before paying off a mortgage loan, consider whether you need an annual mortgage deduction. If you’re self-employed or need write-offs to lower your tax bill, deducting your mortgage interest can shave thousands off your tax liability. However, if you pay off your mortgage loan, you lose this deduction.
2. Can You Handle the Higher Payment?
Paying off your mortgage loan early might seem like a good idea however, seriously consider whether you can manage higher payments. This is especially important if you're refinancing or buying a house with a 15-year term. Due to the shorter term, your mortgage payment will increase by several hundred dollars, which can create problems if you’re unable to handle the expense.
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3. How Does Your Retirement Look?
If you have an extra $300 or $400 a month, putting this money toward your mortgage might work. However, this approach only makes sense if your retirement savings is on track. If you haven't started saving for retirement, or if you're contributing the least amount to your retirement accounts, you might delay paying off your mortgage and focus on beefing up your retirement account.
4. How Much do You Have in an Emergency Savings Account?
Paying off your mortgage loan is an excellent goal, but you shouldn't pay off your mortgage at the expense of your emergency savings account. If you lose a job or need to cover an expensive home repair, you need cash available to handle these expenses — or else you might get stuck using a credit card and incurring debt.
5. How Far off is Retirement?
If you're in your 30s, 40s or 50s, and you’re not planning to retire anytime soon, you can probably postpone paying off your mortgage loan early. However, if you plan to retire in the near future, and you have adequate funds in your emergency savings and retirement accounts, paying off your home loan can work. In this case, getting rid of the mortgage debt can stretch your retirement dollars.
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6. Should You Commit to a Biweekly Pay Schedule?
There are several ways to pay off a mortgage loan early, and some people commit to a biweekly pay schedule. This involves paying one-half of the mortgage payment every two weeks, which results in an extra mortgage payment each year. This method works, but once you commit to a biweekly mortgage, it's a done deal. You can’t go back and forth between biweekly and monthly payments. Therefore, only select this option if you’re absolutely comfortable with making a payment every two weeks.
7. You're Still Responsible for Taxes and Insurance
Paying off your mortgage loan does not eliminate expenses related to your house. For as long as you own the house, you’re still responsible for the taxes, insurance and utilities. Therefore, you will need an income source.
There are definitely good reasons to get rid of your mortgage debt. But timing is everything. Take a long hard look at your situation, and then decide whether now’s the time to increase mortgage payments.
Do you think it’s smart to pay off a mortgage early?
