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At first glance, paying off your mortgage early sounds like a surefire way to save beaucoup bucks in interest and put more money in your pocket. But some financial experts warn that while prepaying your mortgage might sound appealing, it’s not always the best choice.
Over at Forbes, writer John Wasik
I was prepaying our mortgage off for years, then other things came into view: We had two daughters we wanted to send to college. We needed to stockpile cash to cover out-of-pocket medical expenses, which really paid off when we had a catastrophic health event.
So, how do you know if making extra mortgage payments is right for you? Here are three questions to ask yourself before committing to an early mortgage payoff:
What is the state of my retirement savings?
Are your retirement savings where you want them to be? If not, prepaying your mortgage isn’t a smart move, writes Wasik:
Unless you have sufficient home equity and plan to obtain a reverse mortgage in retirement (offered starting at age 62), having the cash in a retirement plan is a better option.
What are my other debts?
If you’re facing burdensome credit card or medical debt — or some other significant debt – “put any excess funds toward those instead of paying your mortgage faster,” says Newsday.
We’ve got some tips for getting rid of those debts in “8 Foolproof Steps to Get You Out of Debt Fast.” One of the most important decisions you’ll need to make is the order in which you plan to tackle your debts. As we have written:
Although some prefer the debt snowball method — which suggests that you pay the debts with the lowest balances first to build momentum — it makes more financial sense to get those with the higher interest rates out of the way first. The ultimate goal is to pay off debt, however, so the choice is yours.
Is the money better spent elsewhere?
Ask yourself whether you can spend the money elsewhere and get a bigger bang for your buck. As MTN founder Stacy Johnson writes in “Ask Stacy: What’s the Fastest way to Pay Off My Mortgage“:
If you’re paying 4 percent on a debt and earning 5 percent on savings, you’ll be better off adding extra money to your savings rather than paying down a debt, because you’re making more on your savings than you’re paying on your borrowings.
This isn’t to say that prepaying your mortgage is not the right choice for you. If you weigh the factors above and do it right, it can really pay off. That’s true even if you’re simply rounding up your monthly mortgage payment by $20 or $50 a month — a tip included in “7 Painless Ways to Pay Off Your Mortgage Years Earlier.”
Do you plan to pay off your mortgage early? Sound off below or on Facebook.