For most homeowners, paying off a mortgage is a hot topic. If you are one of these people who is stuck between paying off their mortgage and investing, this article should guide you to make the best decision.
Making monthly payments can be a frustrating experience especially if you are on a tight income. Thus, to save more money, you may consider paying off a mortgage early to get rid of the debt and own your house without having worries in mind.
But wait, is this really a good decision? How about putting your money on retirement savings? Is paying the mortgage first is really a priority? Let’s find out!
Why Should You Pay for your Mortgage Early?
Since mortgages are set at a fixed rate of 30 years, it is obvious that you will be going to pay it for a longer period of time, and thus, cost you more on interests. You might think that putting your extra money to repay the loan is a good idea but it’s not that easy as it may seem. It all boils down to your financial situation.
Mortgages are lower interest loans and perhaps, you have other credits that need to be dealt with. The bottom line here is, which of these two options will help you save more money?
Paying off your mortgage early keeps you motivated.
Debts bring a lot of stress and sometimes this may get to the point of mental torture. Sacrificing your lucrative life and cutting down your budget for the sake of paying off your loan quickly will keep you determined to be debt – free. With this in mind, you’ll be more concerned with your frivolous expenses and putting the extra cash for a mortgage.
Paying your mortgage loan first gives you peace of mind.
Worrying not to make the necessary payments and the threat of foreclosure can put you in panic mode. You don’t want the lender to claim the collateral and take control of your asset. By prepaying your mortgage, you will have a feeling of comfort that sooner, you can own the house without any financial liability.
Paying off your home saves more money on interest.
By increasing your monthly payment than the minimum payment, you are saving more on interest. For instance, you can finish paying off a 30 – year/4.5% interest $300,000 mortgage loan in just 8 years and 6 months by paying $1820 instead of committing to a regular $1520 monthly payment for 30 years.
By owning your home, you’ll gain more equity.
Paying your mortgage early puts you on advantage when the time comes you need to move and sell it. Through building equity, your home’s value is justified by the amount you owe and not less than its worth.
You could significantly reduce your expenses.
Living to pay monthly bills can suck a lot of energy. If you try to get rid of it as soon as you can, you are cutting your cost of living and thus, you retire early and enjoy life more. When your expenses get lower, you will not be pressured to work in countless hours and sacrifice your health to keep up with your finances.
Why not Pay Early and Choose to Save
The above reasons can sound good and interesting but it is also critical to understand its downsides. There are many considerations that you need to evaluate before you make your decision.
Paying off your mortgage early underestimates the power of investing – the longer you invest, the more money you can grow. Now, let’s get straight to the facts listed below and see why you shouldn’t pay your home early and choose to save.
Low Return on Investment
Since mortgage loans have low interest rates, your return on investment will be obviously low. Instead of doubling your payment, it is better to allocate the extra cash to other expenses like your child’s education, paying another debt, or build an emergency fund.
You Don’t Have Enough Savings
Every dollar spent to a mortgage is a dollar lost for other finances. Financial experts and credit institutions suggest that you should save a minimum of 20% savings from your gross income before putting additional payment to your mortgage. You should secure financial security since your home will consume a lot of your cash.
Homes Can Decline in Value
Understand that there will be changes in the real estate industry from time to time and your home can decrease in value. Investing too much on this means you have not prepared for the things that may happen in the future. Never put all your eggs in one basket.
There are other Smart Ways to Save Money
Instead of giving all your main attention to your home, you can put the extra cash to start a small business and invest in savings. In this way, you can multiply your cash flow and have access to money the time you need it. With saving, you are increasing your financial security and getting out of potential debts. By looking for other investment opportunities, you do not just save money but generate more income stream.
Imagine This Scenario
Assuming that two homeowners have the same income and both applied for 30 – year mortgage loans. Homeowner A decides to pay off the loan early by doubling his monthly payment while Homeowner B opts to make regular payment and invests $475 a month for retirement savings.
Homeowner A will finish the mortgage in just 15 years but look –Homeowner B will have nearly $2 million in savings and a paid – off house in 30 years while Homeowner A has no savings at all!
Homeowner B will have $171,000 in retirement savings but because of the power of compound growth, it climbs to higher amounts. Even if A tries to catch up with B, he will have to spend over $400,000 and that’s an estimated $229,000 mistake! The earlier you invest, the faster your money will grow.
Pay off early or Save? It depends on how you see it, both have their own benefits. It ’s all in the can decide to speed up your loan payments. However, if your finances are not in good shape, do not force yourself to spend more on a mortgage but instead, look for better ways to invest money that will save you in the long run.