Should You Pay Off Your Mortgage Early? Not Always

By Daniel Duffield

Potential Benefits of Paying Off a Mortgage Slowly

 With so many borrowers negatively affected by the burst of the U.S. housing bubble, numerous homeowners are striving to pay off their mortgages as quickly as possible, made somewhat easier by the low mortgage rates currently available. While early mortgage repayment can reduce the overall interest cost of the loan, it is not always the most prudent financial option. This blog post will outline several situations in which it can be equally if not more beneficial to pay off a mortgage slowly, rather than going out of the way to pay it off sooner than the amortized term:

• Mortgage as an Investment

 When purchasing a home, borrowers not only are securing a place of residence but making a real estate investment. As most people are painfully aware, home prices are subject to radical changes depending on the housing market, and appreciation and depreciation are prime factors to consider when purchasing a home. However, in some cases, paying into a mortgage may not be the most prudent investment in the short term; in other words, borrowers could potentially earn a greater return from an alternative investment, such as purchasing stocks or bonds. While these purchases can be as risky if not more so than home purchases, borrowers may find that long-term investments may be more financially beneficial than the quick repayment of a mortgage, especially for homes not expected to appreciate in value.

• High interest debt

 Another prime reason to pay off a mortgage within a normal amortization schedule is to apply these funds to other debts that include higher interest rates. For instance, borrowers with a high amount of credit card debt that carries a burdensome, high interest rate should focus on paying off this revolving debt as soon as possible, rather than investing in home equity. This does not require an excessive explanation; mathematically, borrowers will save more money by paying off high interest debt first, leaving more money to apply toward the home mortgage later.

• Retirement planning and savings

 While paying off a home quickly may be rewarding for the sense of satisfaction in owning the residence, it is advisable that borrowers pay off their mortgage during the standard lifetime in order to apply any additional savings toward retirement planning, such a 401k or other form of retirement investing. Since 401k deductions and the income accumulated through a 401k do not get factored into taxes, borrowers can benefit more from long-term financial planning rather than investing in home equity, especially at such a volatile point in the U.S. housing market.

• Prepayment penalties

 Prepayment penalties are fees that lenders impose on mortgages that are paid off sooner than the standard amortization schedule. If the borrower sells the property or refinances, these penalties will take effect and equate to roughly the amount of interest that the borrower will otherwise would have paid if the mortgage was paid off in the normal timeframe. Borrowers should always attempt to secure mortgage loans that do not include these costly fees, and homeowners with prepayment penalties stand to gain little and less from paying off their mortgages ahead of schedule.

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