If you’re as afraid of debt as I am, then the idea of having a mortgage looming over your head for over 30 years might sound scary. I mean, don’t we hear that paying off debt as fast as you can is the best thing you can do? If you wondering if you should pay off your mortgage early, you probably shouldn’t.
But wait, I hear you asking, that doesn’t make sense. And you’d be right if it was any kind of other debt. When it comes to your mortgage, it probably is in the hundreds of thousands of dollars. Paying ahead on such a large amount comes with some financial risks.
1. It puts your money in Equity Jail
I wrote an extensive article explaining what Equity means. Basically, Equity is the value of a homeowner’s interest in their home. It’s how much the house is worth minus how much you owe on the home.
The problem with paying paying off your mortgage early is you end up locking up your money in equity. Unlike stocks or cash in the bank, getting money out of your house is very difficult to do. You would either have to open a equity line of credit, home equity loan, or just sell the house.
All of this takes time. If you are in a financial emergency and needed cash ASAP, it’s basically stuck in the home you have paid off. Sure, you could get it out through the ways I listed above, but it’s never that easy.
So before you consider paying off your debt early, realize that your money will be in equity jail. If you pay off a $100,000 home, you have $100,000 tied up as equity.
2. You should invest elsewhere
At the time of writing this, interest rates were as low as 2.8% On a 30-year fixed loan. With how low interest is, it’s almost free money, and financial sin to you wants to pay it off.
Instead of putting 2 or $300 extra towards your mortgage, you could instead be invested elsewhere. For instance, investing in an ETF good average you 5 to 7% returns every year. You can basically make more money investing that extra money you have than paying off your mortgage early.
If you don’t invest that money elsewhere, you are going to face opportunity cost. Sure, you might have a paid-off mortgage, but the money you might have saved on interest is far less than how much that money could have earned being invested.
3. Pay off your other debts first
Like I mentioned earlier, the interest rates for 30-year fixed mortgages are much lower than any other debt you might have. If you have a car loan or even a credit card, it makes much more financial sense to pay that off first.
This one is a no-brainer. Unless you absolutely no other debts left, then you might consider paying off your mortgage early. If not, then the interest you are paying on your other debts should be your main priority.
4. You could pay prepayment penalties
Here’s the the thing with banks. They are not really your friend, they are out there to make money. If you go ahead and pay off your mortgage early, they end up losing money from the interest you would have paid. So what do they do instead? They end up charging you prepayment penalties. What are those you might be asking?
Prepayment penalties, like the name suggests, are penalties you pay for paying off your mortgage early. Depending on your lender, they might be 4% of your mortgage. So for example, if you have a $300,000 mortgage, your penalties would cost you $12,000.
If you’re really trying to save money, then this might end up costing you more. So make sure that you ask your bank, or check out your mortgage agreements to see if there are any penalties for paying off your mortgage early.
Final thoughts
if you really want to pay off your mortgage, then it’s important to take into consideration the disadvantages that come with that. Only consider paying off your mortgage under these circumstances:
- You have a 6-month emergency fund in place
- You have paid off all your other debts
- You avoid paying penalties if possible
- You have a healthy investment earning you more than your mortgage interest
- Your long term goals align with this
If all those are true and you are determined to pay off your mortgage, then go right ahead! Just make sure you take your time and consider all your options.
If you are unsure of any of this, then take the time to consult a financial advisor. They will definitely be helpful in outlining your options.
Hope this helps, and comment below if you have any thoughts or suggestions 🙂
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