Most homeowners take out a mortgage to help them buy their homes, and for many, their mortgage loan is the largest debt they'll ever take on. That makes handling mortgage debt one of the most important financial decisions you'll ever make, yet there are also many non-financial factors that come into play when deciding how best to pay back a mortgage loan.
Although many homeowners simply make their mortgage payments on schedule month in and month out, some use some basic techniques to pay their mortgages down early. There's debate about whether that's a good idea, and as Motley Fool personal-finance expert Maurie Backman notes, there are some good reasons not to pay down a mortgage early. Here, you'll see some of the counterarguments to those points favoring an early payoff.
1. Stop making your mortgage lender rich at your expense
The most obvious reason to pay down a mortgage early is to save on interest costs. If you've ever looked at how much interest you'll pay on your mortgage over its full term, it can be staggering. A typical 30-year mortgage at today's average interest rate of 4.65% will involve your having to pay almost $257,000 in interest on a $300,000 loan. In the first month of your mortgage alone, almost $1,165 of your $1,550 payment goes toward interest, leaving just $385 to pay down principal.
Making additional payments toward paying off your mortgage early don't just reduce your outstanding debt. They also reduce the amount of interest you'll owe going forward. That can create a snowball effect that will help you pay down your mortgage a lot faster than you might imagine is possible.
2. Save yourself unnecessary costs on mortgage-related services you don't really want
When you take out a mortgage, you also often end up having to get additional services that involve paying extra fees. For instance, most lenders will require that you have private mortgage insurance if you don't make a minimum down payment of 20% or more when you first purchase your home, and that protection can cost you hundreds of dollars in additional premiums every month. Fortunately, you don't have to prepay your mortgage in full to get out from under PMI costs, as your lender will no longer be able to require you to keep PMI in force once you've paid it down enough to bring your home equity up to about 20% to 25% of the value of your home.
In addition, many lenders require that you pay money into escrow accounts to cover the cost of real estate taxes and homeowners insurance. Paying off your mortgage early puts those expenses back in your control, and you won't have to pay extra escrow maintenance fees to your lender or mortgage servicing company once you've paid off your mortgage loan. You can use those fee savings to go toward much more critical expenses like home maintenance or the insurance and taxes that the escrow used to hold.
3. Greater financial flexibility
Finally, not having a mortgage payment hanging over your head makes it much easier to handle your month-to-month finances. For those who are still working, the money that used to go toward a mortgage payment can instead go toward other big-ticket expenses, such as saving for college for a child or contributing toward retirement savings. For retirees, the benefits are even greater, as those on a fixed income no longer have to see a huge chunk of their monthly cash flow go to a mortgage company.
Retirees with paid-off mortgages also have the option of taking out reverse mortgages to tap a large portion of the equity in their homes. With various reverse mortgages offering a choice between regular monthly income or lines of credit that give you the ability to draw larger sums all at once, full access to reverse mortgages are a reward for handling your mortgage expeditiously earlier in life.
Be smart about mortgage debt
It's true that paying down mortgage debt has a cost. Diverting money toward paying off your mortgage early means less in your investment accounts, and the tax-deductible nature of mortgage interest makes it preferable to other types of debt. Yet when you take the positive financial impacts and combine them with the peace of mind that having a paid-off home gives you, you might well agree that setting the goal of paying off your mortgage early is a worthwhile aspiration.