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For many homeowners, your mortgage accounts for most of your debt.
So it makes sense if you want to pay off your mortgage early. After all, how much different would your monthly budget feel if you didn’t have a mortgage payment?
There are trade-offs to consider, though. If you’re putting extra resources toward paying off your home loan, then you’ll have to sacrifice on other financial goals. So there’s no blanket answer to the question: Should you pay off your mortgage early?
“What are you trying to accomplish would be the first question I would ask,” says Russ Morgan, co-founder, along with Joey Mure, of the personal finance community and podcast Wealth Without Wallstreet. Where paying off your mortgage falls on your priority list really depends on your current financial situation and your goals for the future.
Before you make the decision, you should take a look at the big picture. Here are three questions to ask yourself before deciding whether this is the right move for you.
3 Questions to Answer Before You Pay Off Your Mortgage Early
Tai and Talaat McNeely paid off their 30-year mortgage in only five years. They credit the freedom that came with not having a mortgage payment for the decision to go into business full time. “[Talaat] wouldn’t have been able to walk away from his job if we had this huge mortgage, there’s no way,” says Tai. “The risk, the fear, wouldn’t have allowed us to do that because entrepreneurship isn’t guaranteed either.” Now, the couple runs a personal finance site, His & Her Money.
But committing your disposable income to paying off your mortgage isn’t always the right answer. “A lot of times people jump to the conclusion that paying off the debt is clearly going to be the best way forward, when the true answer is usually more nuanced than that,” says certified financial planner with Modern Money Advisor, Arielle Minicozzi.
Here are a few questions you should ask yourself to help you make the best decision for your circumstances.
1. Are you financially prepared for an emergency?
Having an emergency fund and having equity in your home are not the same thing. Your home’s equity may help boost your overall net worth, but it’s not money you can easily access. “You’ve got to be prepared if something crazy ends up happening,” says Mure. “Equity in a house is dead unless you sell it or refinance it.” And if you lose your job, it’s much more difficult to do a cash-out refinance on your home.
There’s a lot of debate about how much you should have in an emergency fund. But, Minicozzi likes to see people have at least six months’ worth of expenses “before they start looking at paying off high-dollar debt like a mortgage.” And she recommends saving even more if you’re supporting a family or are self-employed.
The McNeelys paid off their mortgage in five years by committing to always making more than the minimum payment on their mortgage. But they started small, paying only $20 extra each month — and they saved up beforehand, too. “We put aside our six-month emergency fund. That was already done when we really decided to go full force in paying off our mortgage,” Tai says. Not only that, but they also had paid off all of their consumer debt as well.
So committing every extra dollar to paying your mortgage is something that only makes sense if you’re already prepared for unexpected emergencies.
2. What else could you do with the money?
Before you decide to pay off your mortgage early, it’s a good idea to assess your financial goals and habits to determine if it’s the best use of your money.
“A mortgage is just a tool that can get you closer to financial freedom or farther from financial freedom, depending on how you use it,” Mure says. Mure and Morgan define financial freedom as having your passive income (such as returns generated by market investments) exceed your living expenses. If that’s your financial framework, then it makes sense to look for opportunities to invest that will have a greater return than what you would save in interest by paying off your mortgage.
It’s important to also understand your ability to tolerate risk. The McNeelys didn’t want to work toward traditional retirement and wanted to work for themselves. “We wanted to control the things that we could control. You can’t control the stock market, you can’t control the real estate market, but we could control the roof over our heads,” Tai says. For them, reducing their expenses by paying off their mortgage brought them more financial freedom.
If you’re not sure where to invest your money, paying off a home loan can be a simple way to start reducing the interest you’ll owe. “When you’re paying toward the principal of your mortgage, you’re getting a guaranteed return,” says Marissa Lyda, founder of the personal finance site, The Budgeting Wife. Many people may prefer that to any hypothetical returns they might get from other investments. For example, you could save approximately $82,000 in interest by paying off a $300,000, 30-year loan with a 3% interest rate 15 years early.
And if you’re struggling to develop healthy spending habits, paying down your home loan is a better move than spending your extra money on non-essentials. “Human behavior trumps all situations,” Mure says. If you’re just going to spend your extra money, then you’re better off paying down your mortgage.
3. Where do you find your peace of mind?
When it comes down to deciding on whether you should pay down your mortgage, there are some factors that can’t be captured by numbers. The peace your financial decisions bring you is important. “Everything about personal finances doesn’t fit into a calculator,” Talaat says. “There are a lot of intangible benefits to making certain types of decisions with your money.”
For Lyda, the security and peace of mind that can come with not having a mortgage are important to consider. “It also gives you a lot of freedom if you want to make a career change and maybe you have to take a pay cut,” Lyda says. If your home is paid off, then a mortgage payment doesn’t factor into your career decisions.
But even if you pay off your mortgage, living in your home won’t ever be completely free. You’ll still have to pay for maintenance, property taxes and insurance for as long as you have the home.
There’s no right answer to whether you should pay off your mortgage early. It depends on your goals and your current financial circumstances. Before you commit every extra dollar to paying off your mortgage, you should seriously consider building up your emergency fund. Once your money is stored in your home as equity, it won’t be easy to access it, especially if you lose a job.
Save up at least six months worth of living expenses before you start paying off your mortgage early.
Regardless of what decision you make right now in how you want to balance paying off your future and investing for the future, you’re allowed to change your mind later on. Lyda and her husband initially invested their extra cash because their mortgage rate was so low and they could make more off of their investments. But as time went on, they switched to extra mortgage payments.
Paying off your mortgage early can be a good way to add flexibility to your monthly budget and your life in general. But it can be a serious financial commitment that needs to be balanced with paying off other high-interest debt and investing for the future.