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.
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 might not be a smart move, according to Money Talks News founder Stacy Johnson.
A couple of years ago, a reader named Retha asked Stacy whether she should pay down her mortgage or save more for retirement. Stacy gave the following advice to Retha — and everyone else:
Job one for people in Retha’s position should be to put aside as much as possible in tax-advantaged retirement accounts. Priority two should be saving as much as possible outside of retirement accounts. Only after building a comfortable cushion should you use spare cash to pay down a mortgage.
What are my other debts?
If you’re facing burdensome credit card or medical debt — or some other significant debt – you need to prioritize paying down those obligations.
We’ve got some tips for getting rid of those debts in “8 Guaranteed Ways to Get Rid 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 clear 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 Stacy 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.
Stacy offers more thoughts on this topic in “2-Minute Money Manager: Should I Use Savings to Pay Off My Mortgage?”
Now, none of this is 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.