Is Clearing Your Mortgage Ahead of Schedule a Wise Financial Move?

A mortgage represents the most substantial form of debt for the majority of individuals. For a typical homeowner, the burden of payments accumulates to hundreds of thousands of dollars throughout the life of a home loan.

Given this financial weight, it's a common aspiration to pay off the mortgage. Thomas Balcom, a certified financial planner and the founder of 1650 Wealth Management in Florida, expresses his support for this goal: "I am a big fan of paying off one's mortgage – not from a financial standpoint, but from a peace of mind standpoint. Not having a mortgage payment is a good stress reliever."

While paying off the mortgage is a sound decision for many, it may not be the right choice for everyone. It's crucial to grasp the advantages and disadvantages before embarking on this path.

Benefits of Settling Your Mortgage Ahead of Schedule

Paying off your mortgage offers several financial advantages:

Budget Flexibility: Clearing your mortgage eliminates what is likely your most significant monthly expense, providing you with increased financial flexibility.

Interest Savings: By settling your home loan, you stand to save substantial amounts in mortgage interest over the loan's duration. Nicole Sullivan, a certified financial planner from Illinois, notes, "You are, at the end of the day, saving money by not having to pay interest, which is an expense. You're also eliminating an enormous amount of debt."

Increased Savings for Other Goals: The absence of mortgage payments opens up resources for pursuing other long-term objectives, such as saving for retirement or indulging in more frequent travel.

Drawbacks of Settling Your Mortgage Ahead of Schedule

While paying off your mortgage has its benefits, there are potential drawbacks to consider:

Reduced Cash for Immediate Expenses: In the short term, directing more funds toward paying down the mortgage may tighten your cash flow, drawing on your savings and earnings. Clark Randall, a certified financial planner at Creekmur Wealth Advisors in Dallas, advises caution: "Make sure you can afford to do it without stressing your cash reserves. You are placing a large amount of money in an extremely illiquid asset."

Possibly Lower Savings Than Expected: The savings from paying off your mortgage may be less than what you could potentially gain by investing that money elsewhere. Anna Sergunina, a certified financial planner and president/CEO of MainStreet Financial Planning, suggests, "Most who had mortgages before interest rates increased should be able to make a 5% yield in savings accounts and continue paying a 3% mortgage."

Potential Fees: Some mortgages come with prepayment penalties for early payoff. These fees can offset the advantages of paying off the mortgage, reducing the overall financial gain.

What Are the Present Mortgage Interest Rates?

Mortgage rates have seen a decline this week, reflecting a drop in the 10-year Treasury yield, as reported by the Mortgage Bankers Association. The average rate for a 30-year fixed mortgage decreased by 20 basis points to 7.17%, and the average FHA mortgage rate went below 7% for the first time since August.

As of December 6, the current mortgage rates are as follows:

30-year fixed: 7.17% with 0.6 points (compared to the previous week's 7.37% with 0.64 points).

15-year fixed: 6.8% with 0.77 points (compared to the previous week's 6.88% with 0.52 points).

5/1 ARM: 6.58% with 0.69 points (compared to the previous week's 6.59% with 0.76 points).

30-year jumbo loans: 7.35% with 0.44 points (compared to the previous week's 7.54% with 0.62 points).

30-year FHA loans: 6.98% with 0.84 points (compared to the previous week's 7.18% with 0.81 points).

Is It Smarter to Settle Your Mortgage Early or Invest?

Determining whether to pay off your mortgage early or invest the money depends on your life circumstances and goals. According to Nicole Sullivan, a certified financial planner, it's crucial to ask yourself about your objectives and whether you aim to grow wealth or have additional cash flow for spending needs.

In certain situations, investing extra money with the hope of earning a higher return may be more advantageous than using it to pay down the mortgage. Clark Randall, a certified financial planner, explains, "Very simply, if your mortgage rate is, say, 3% and you can earn more – like 5% – on your money, it makes financial sense to keep the mortgage."

Your life stage is also a factor in this decision. For instance, if you are nearing retirement, paying off the mortgage might be more appealing than investing in the stock market. Randall suggests, "As a financial planner, I suggest trying to be debt-free and own your home in retirement. If you always have a place to live that is already paid for, you can get by on a reasonable amount of money each month."

Consider These Questions Before Deciding to Settle Your Mortgage Ahead of Schedule

Deciding whether to pay off your mortgage early requires careful consideration. Ask yourself the following questions:

Financial Health: Are your finances in good shape? Have you addressed high-interest debts like credit cards? Do you have an adequate emergency fund?

Goals and Motivations: What do you hope to gain? Whether it's freeing up budget space or seeking peace of mind, understanding your goal is crucial before committing to paying off the mortgage.

Prepayment Penalty: Check if your lender imposes a fee for early mortgage payoff. Calculate the cost and evaluate whether paying off the home loan prematurely remains a sensible choice.

Financial Flexibility: Paying off a mortgage often requires a significant upfront payment. Assess whether this will leave you with enough liquidity to cover other expenses and maintain financial flexibility.

Investment Returns: Can you potentially get a better return on your money by investing or keeping it in a high-yield savings account, especially if your mortgage rate is low?

Tax Implications: Consider whether paying off the mortgage will impact your ability to claim a mortgage interest deduction on your tax return, keeping in mind changes introduced by the Tax Cuts and Jobs Act of 2017.

Other Financial Goals: Evaluate the impact on your ability to save for other critical goals such as retirement, children's education, or other priorities.

Life Changes: Consider potential emotional and financial benefits or drawbacks associated with paying off the mortgage, taking into account how it may align with your changing circumstances.

Strategies for Accelerating Your Mortgage Repayment

If you're ready to pay off your mortgage and want to make the process more manageable, consider the following steps:

Biweekly Payments: Opt for biweekly payments, where you make half of your mortgage payment every two weeks. With 52 weeks in a year, you end up making an extra payment annually. This additional payment directly reduces the principal balance, lowering the total interest paid over the loan's life.

Budget for an Extra Payment Annually: Plan for an extra payment each year by saving up the money throughout the year and making the additional payment as the year concludes. This approach offers flexibility for homeowners who prefer this method.

Refinance and Increase Monthly Payments: If mortgage rates are favorable or if you have a high rate, consider refinancing to a shorter loan term or an adjustable-rate mortgage with a lower rate. The savings from refinancing can then be used to make additional payments towards the principal. Clearly communicate your intentions to your lender to ensure the extra payments are applied to the principal.

Make Larger Payments When Possible: Make larger payments whenever you have the financial means to do so. After making substantial payments, consider mortgage recasting. This involves making a lump sum payment, and in return, the lender agrees to lower your monthly payments without the need for refinancing. Thomas Balcom, a certified financial planner, recommends this strategy and notes, "This is the strategy that I utilized when paying off my mortgages in the past."