Mortgages account for the most common type of personal debt in the United States. Why? Because when you take out a home loan, depending on the type of mortgage, you generally finance 80% of the home price. But the total cost of a mortgage isn't just the actual price tag on a home, it includes the interest you pay on the loan itself.
For example, if you take out a 30-year fixed mortgage loan, you can plan on sending a payment (covering both your principal, interest, and homeowners insurance) to your lender for the next three decades.
Unless you decide to pay off your mortgage early.
Getting out from under your mortgage, if you can afford to do it, may offer advantages that can positively impact your finances, as well as your quality of life, especially in retirement.
Here are four reasons to consider if paying off your mortgage early is beneficial for your long-term financial prospects.
1) Tackle Other Debts
One of the biggest benefits of paying off a mortgage is having more financial security over a long-term basis. Without the burden of a mortgage to pay every month, you may find yourself with extra breathing room in your budget.
If you were struggling to pay bills before your mortgage was paid off, you will be able to redistribute the money you would have paid on your mortgage towards high utility bills, credit card balances, college loans, and other kinds of debt.
Some financial experts caution that you should not sacrifice your retirement in order to pay off your mortgage. If you are retired it may pay to weigh the pros and cons of paying off a mortgage versus boosting your retirement accounts.
2) Paying off a Mortage Reduces the Cost of Interest
A huge financial liability that homeowners deal with when applying for a mortgage is the hefty cost of interest on the loan. The longer you carry a mortgage, the more you pay in interest.
By paying off your mortgage early, you may save significantly due to the additional cost of interest, especially if your home loan had a high-interest rate when you took out your mortgage.
- Paying off your mortgage early could free up your cash for travel, retirement, or other long-term plans.
- Being mortgage-free may insulate you from losing your home if you run into financial difficulties.
- The interest accrued on a home loan can run upwards of tens of thousands of dollars during the lifetime of the mortgage.
3) Protection During Unstable Housing Markets
A major concern for many homeowners, especially if they remember the Great Recession, is the impact that an unstable real estate market can have on homeowners. Being able to keep up with your mortgage payments during a large-scale financial crisis is a real concern for many homeowners.
For example, if you find yourself in need of cash suddenly, and you want to tap equity out of your house, it may be difficult to do if the value of your home goes down due to an unstable market.
But if you have paid off your mortgage, at least that monthly financial burden is lifted, and you can wait for the market value of your home to improve.
4) Financial Freedom to Pursue Other Ventures
A pleasant advantage of paying off your mortgage, assuming you have no other debt, is that it may give you the financial freedom to pursue other ventures.
Whether you have always dreamed of living somewhere tropical, traveling around the world, or owning your own business, having extra money in your bank account every month will allow you to pursue other economic opportunities.
The Bottom Line
Paying off a mortgage is a dream for many homeowners. If this goal is within reach for you and your family it might be a smart move to satisfy your mortgage balance.
Not only will it free up extra money every month, but it provides added financial security during a housing crisis, allows you to save more, and may even let you chase down your dreams that need extra financial backing.