Have you ever considered whether you should try and pay off your mortgage early? Many people have. But, a mortgage is different kind of debt than most… so it is good to evaluate all the advantages and disadvantages before you make that leap.
The first consideration is other debt. In almost every case, before you ever consider making extra payments on your mortgage you should first focus on all your other debt. In almost every instance, whether it be a credit card, student loan or car, that debt is costing you more to keep in interest than a mortgage.
What about once you have paid off all other debt? Should you pay your mortgage down then? Before you answer that question, it is good to consider two important details: the interest rate and the tax savings.
What is your mortgage interest rate? These days most people have a lower rate due to the big dive in rates and subsequently all the refinances. If your rate is less than 6%, you actually may be better off putting all your extra money into a retirement account rather than buying down a mortgage. If your rate is above 6%, then you have to look at the various types of investments and compare. If you can find an investment that pays more of a return than your mortgage interest rate, then that would actually be a better deal.
Additionally, a huge advantage in having a mortgage is the tax savings on the interest. If your mortgage is relatively new, this interest savings can be significant to your income tax bill. The quicker you pay off your mortgage, the less you will get to save on taxes. This is unique in the debt world, as a home loan is one of the few debts where you receive a tax savings for having it.
In turn, the main advantage in paying off your mortgage earlier is the total lifetime interest savings and the eventual monthly cash flow increase. Depending on your situation, this can certainly be a huge advantage. Usually it is best to pay off all your other debt and start a serious investment plan, before you pay off your mortgage. But, if you have the rest in place… it could be a great next step to financial freedom.
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