Almost everyone who buys a home needs a mortgage loan to do so.
The thought of repaying a mortgage for the next 20 or 25 years can seem like a daunting financial burden. That’s why after a few years, some borrowers start to think about paying off their mortgage before the end of the mortgage term.
However, before deciding to use a salary increase following a job promotion, an inheritance or extra savings to pay off a mortgage, it’s important to take a step back and determine whether it really makes financial sense.
As a first step, using a remaining mortgage payoff calculator can help you calculate the amount of principal and interest that needs to be paid in the event the mortgage is paid off early.
It’s also prudent to first contact your mortgage lender, just to be sure whether there are any financial penalties for early repayment or any other conditions which need to be complied with. However, despite such conditions, it might be possible to negotiate the mortgage payoff terms. For example, if the loan is at fixed relatively low interest rates and the lender can achieve better rates from another loanee, the mortgage provider may be prepared to discuss some concessions for an early payoff.
Given that there are clearly pros and cons of early repayment, let’s have a look at some of these more closely:
Benefits of paying off a mortgage loan early:
- It eliminates the need to make monthly mortgage payments. This frees up cash which would otherwise be used for repayments — and which might be especially useful when nearing retirement.
- No longer paying interest on a loan can effectively be the same as earning a risk-free return equivalent to the mortgage interest rate.
- Over the lifetime of the mortgage, the savings on the interest on the loan can potentially add up to thousands of dollars.
- The borrower has more equity, which may be used for any subsequent loan requirement.
- Some people have more comfort when they own their property outright. Not having any more mortgage repayments also allows for better budgeting for future expenses.
On the other hand, things to consider by not paying off a mortgage loan early include:
- Early repayment will tie up a large amount of capital. As real estate is a non-liquid asset, it can take months (or even longer) to sell a property and access the capital if it is needed.
- Mortgage interest tax deductions can no longer be claimed.
- Deploying capital to repay a loan might mean that borrowers miss out on potential higher returns from other investments. It might be better to use the funds to take the extra cash and leverage it into buying a cash flow-positive property — especially as mortgage rates are at all-time lows.
- If you have no other real use for the money being used to pay monthly instalments, then early repayment may not be a necessity. In fact, it’s usually better to pay off high-interest debt (such as credit card debt or personal or car loans) before making extra mortgage payments or redeeming a mortgage.
- Sometimes balancing a “partial pay off” with saving for retirement is a “compromise option”. Continuously putting money into a tax-advantaged retirement account and having a good retirement amount (as well as having a mortgage repaid by the time you retire) can be a good combination.
Axiom Mortgage Solutions Can Help
When considering whether to pay off your mortgage early, it’s important to figure out what works best for your own particular situation and what is most likely to help you reach your short- and long-term financial goals.
As such, it’s necessary to talk to your mortgage provider about the mortgage payoff process, terms and conditions, as well as to speak with a professional mortgage adviser to help you through the process.
After all, we know that sometimes it’s not just the figures that count. You have to work what’s best for you overall!