Tips When Paying Off Your Mortgage
In many cases the earlier you can pay off your mortgage the better.
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Not only do you rid yourself of what is probably the largest debt hanging over your head, but you will usually save thousands in interest. However, paying off your mortgage early is not always the best thing to do, so take some time to think it over.
Is Paying Off Your Mortgage Best?
It often depends on what other debts you have or what type of mortgage you took out in the first place. You can use a free online mortgage repayment calculator to see how changes in your repayment scheme or changes to your mortgage policy will impact your finances, which should help before you settle on a decision.
A flexible mortgage will almost always benefit you the earlier you pay it off. The advantages of this type of mortgage are that you can overpay when you have some spare cash but also take that money back at a later date if you find you are suddenly short of funds, and you won’t be charged any extra fees for doing so.
Depending on your interest rate, you could potentially save tens of thousands of dollars in interest if you manage to pay it off a few years early.
If you have other debts then this could mean it is not beneficial for you to use spare money to pay off your mortgage. The typical mortgage interest rate is somewhere between 4% and 6%.
Credit cards and store cards often charge around 25% to 30%, which is a huge difference. It may seem like you will save money by paying off your mortgage early as this is the biggest type of debt, but over time you will pay more on a maxed out credit card than on a mortgage.
Mortgages are still one of the cheapest ways to borrow money from banks and building societies, so take that into account when making your calculations.
If you have a fixed mortgage it can be less than worthwhile paying it off early. Many banks will only let you overpay by a certain amount each month anyway, and some will have an included early repayment penalty.
WSL Editor’s Note: Having your debts prioritized is always important and I don’t think it would ever be wise to focus on paying your house off before your pay off some of your smaller debts. If you’re a Dave Ramsey fan (like I am), you know that you should focus on your credit cards, student loans, and other small debts, and only make the house a focus once you’re on baby step 5!
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We’re not in a huge rush to pay off our mortgage. We try to make an extra payment or two throughout the year to try and shave some years off. Thankfully it’s our only debt so anything extra can be thrown at that.
We used to want to pay off our house ASAP, but now we’re unsure about whether we want a second house in 2014.
I totally agree with you Andy! It’s best to focus on other debts first before tackling your mortgage.
We haven’t made a concerted effort to pay off the mortgage early, especially since it was only a 10 year note, but as with all of our debt accounts, we do use the rounding method. Everything gets rounded up to the next $50. So instead of paying $219/month, we pay $250. It shortens the repayment period by nearly a year for us.
Paying off my mortgage was on my list, but now I am working on saving up for a down payment on another home. We want to sell and it doesn’t make sense anymore to pay down the mortgage.
When I had a blended mortgage, I paid as much as I possibly could. Then I refinanced, locked in an excellent rate and slowed down the extra payments in lieu of building savings/retirement (I was doing these things before but putting less towards them).
All of this happened AFTER I cleaned up my credit card mess!
In some cases, it isn’t wise for someone to pay off their mortgage. It really depends on where you stand financially. Unlike other types of debt, a mortgage should be used as way to leverage your household budget. This way you help free up your budget to reallocate that money to a better opportunity.
In other cases, you are better off not having a mortgage at all. It all depends…unique circumstances.
We bought our first house together in mid 2009 for $265k with an $80k downpayment (not all of our liquid cash) with a 5 year fixed mortgage and were allowed to pay something crazy like $37k extra on the mortgage per year. We were also able to up our weekly payments by one full payment per month. We just saved our money, budgeted like mad and stuck to it best we could and paid an extra $5k a year on the mortgage. We have the cash now to pay it in full which are the plans. It makes us sleep better knowing we owe no one anything. We balanced the mortgage while investing in our retirement. We will focus more on building our emergency savings again, renovations, investing and maybe some real estate. Mr.CBB
For anyone who took out a mortgage with a super low interest rate these past few years, I don’t think paying it off early should be a big priority. You’re exactly right that higher interest debts should be the priority, and then even some investment opportunities could be a better use of the money depending on your mortgage rate.
As the interest rates are still so high in Australia my first priority is to pay off all of our mortgage debt ASAP.
I used to think that paying off my Mortgage would be great. Over the years I’ve learned that the mortgage is the last thing I should pay off. I’ve categorized my debt into three key categories to help me focus on what to pay off first. First is my unsecured debt (credit cards, revolving accounts and the like), In my opinion this should be the focus as it takes away from your net worth and typically has the highest interest rate. Next is secured debt such as car loans, which although still a debt have an end date and are backed by a tangible asset, and finally my mortgage debt.
We don’t have any debt except for our mortgage. Right now we’re trying to decide if we want to work towards paying off the mortgage early, or save for a downpayment on a second home we’d use as a rental property.