Mortgages account for the most common form of personal debt in the United States. Why? Because if you take out a home loan, you usually finance 80% of the house price, depending on the type of mortgage. But the total cost of a mortgage isn’t just the actual price tag of a home, it also includes the interest you pay on the loan itself.
For example, if you are taking out a 30-year fixed mortgage loan, you can plan to send a payment (which will cover both your principal, interest and homeowners insurance) to your lender for the next three decades unless you decide to prepay your mortgage.
Getting out of your mortgage — if you can afford it — can provide benefits that can positively impact your finances, as well as your quality of life, especially when you retire.
Below are four reasons to consider whether paying off your mortgage early is beneficial to your long-term financial prospects.
Key learning points
- Paying off your mortgage early can free up your money for travel, retirement, or other long-term plans.
- Being mortgage-free can keep you from losing your home if you run into financial difficulties.
- The accrued interest on a home loan can reach tens of thousands of dollars during the term of the mortgage.
1. Tackle Other Debts
One of the biggest benefits of paying off a mortgage is that you have more financial security in the long run. Without the burden of a mortgage that you have to pay each month, you may have extra breathing room in your budget.
If you struggled to pay bills before your mortgage was paid off, you can redistribute the money you would have paid on your mortgage into high utility bills, credit card balances, student loans, and other types of debt.
2. Paying off a mortgage lowers interest costs
A huge financial obligation that homeowners have to deal with when applying for a mortgage is the hefty interest costs on the loan. The longer you carry a mortgage, the more interest you pay.
By paying off your mortgage early, you can save considerably due to the extra interest charges, especially if your home loan had a high interest rate when you took out your mortgage.
3. Protection during unstable housing markets
A major concern for many homeowners, especially if they remember the Great Recession, is the impact an unstable real estate market can have on homeowners. Keeping track of your mortgage payments during a major financial crisis is a major concern for many homeowners.
For example, if you suddenly need cash and you want to take equity out of your home, it can be difficult to do so if your home’s value falls due to an unstable market.
But once you’ve paid off your mortgage, at least that monthly financial burden is gone and you can wait for the market value of your home to improve.
Some financial experts warn that you should not sacrifice your pension to pay off your mortgage. If you’re retired, it may be worth weighing the pros and cons of paying off a mortgage against increasing your retirement accounts.
4. Financial Freedom to Pursue Other Enterprises
A nice benefit of paying off your mortgage, assuming you have no other debts, is that it can give you the financial freedom to pursue other ventures.
Whether you’ve always dreamed of living somewhere tropical, traveling the world or owning your own business, having extra cash in your bank account every month can help you take advantage of other economic opportunities.
It comes down to
Paying off a mortgage is a dream for many homeowners. If this goal is within your reach for you and your family, it can be a smart move to top up your mortgage balance.
Not only will it free up extra cash each month, but it will provide additional financial security during a housing crisis, allow you to save more, and may even help you pursue your dreams that need extra financial support.