Can Paying Off Your Mortgage Early Hurt Your Net Worth?

By Gerald Morales | April 04, 2014 AAA

Saving your money and making double or even triple payments on a mortgage may sound productive, but it could hurt your overall assets for the future, giving you less to utilize during retirement.

While paying off your mortgage early sounds like a priority, you need to truly think long-term for your future. Instead of worrying too much about paying your mortgage early, you should be concerned with how to build a foundation of wealth for your future.

Paying mortgage early may result in penalties

Depending on who your lender is, you may be subject to prepayment penalties should you decide to make extra payments on your mortgage. Some banks do not allow prepayments since it hurts their overall return on investment. Refer to a representative or your mortgage documents to determine if paying your mortgage off early will constitute any penalties.

“A prepayment penalty is a provision that states that in the event you pay off the loan entirely, you will owe a penalty,” explains John Walsh, president of Total Mortgages Services. Penalties are usually expressed as a percent of the outstanding balance at the time of prepayment, or a specified number of months or interest, Walsh adds.

Plan for an extended retirement

A person reaching age 65 today has a life expectancy of 85, according to the Social Security Administration. Even more eye-opening, one out of every four people age 65 today can expect to live past 90, while one out of every 10 should get past age 95. That means even if you’re nearing retirement, you should plan for a financially stable life for at least 30 years.

Paying off a mortgage early may benefit you temporarily, but in the long run you are better off having more money allocated towards your retirement. If you can devise a plan to create a diversified portfolio, as well as pay off your mortgage in a reasonable amount of time, you can help create a promising future.

A variety of assets gives you more leverage

Your home equity is a valuable asset to have, but it is more valuable to diversify your assets, which give you more to work with in the event that you need some cushion. Should an unexpected expense arise, you can at least tap into these funds before you decide to let go of the equity in your home.

Do not neglect ways you can earn more money for retirement. For instance, if your employer matches your 401(k), make sure you are contributing the maximum amount each year. An employer that matches your contributions is essentially giving you “free money,” so do not let it slip past you.

You can also use money to place into a high-interest savings account, certificate of deposit, or any other type of retirement investment account. As long you are utilize your money to save or invest, you can significantly increase your net worth over an extended period of time.

With a variety of investments, you can also help solidify your chances of receiving a steady income well into retirement. It is a good idea to have money coming in because even if you manage to fully pay your mortgage off, you still have to think about the general cost of living during retirement.

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