Tips for Early Mortgage Payoff
Paying off your mortgage early may not always be
the best solution. We've put together some early
mortgage payoff tips to help you determine what's
best for you.
A 2006 study by the University of Michigan shows that 40% of households make the incorrect decision to
pay off their mortgages early. That means many homeowners pay their mortgages off early, when there
was a better financial alternative.

When Early Mortgage Payoff Isn’t Smart

Some loans include a mortgage prepayment penalty if you pay off your mortgage too soon. This penalty
is typically assessed if you pay over a certain amount of money toward your mortgage in a single year.
Some mortgages penalize you if you pay more than a certain percentage of your scheduled payments in
a year. Others penalize you if you pay even a single dollar over your scheduled mortgage payments.
Before you start sending extra mortgage payments, check your loan documents to make sure there is no
penalty.

If you have any
credit card debt, you should focus on paying it off before considering paying off your
mortgage early. Credit card debt is often more expensive to carry than a mortgage because it has a
higher interest rate. In the grand scheme of things, you’re not saving much money if you pay off you lower-
interest rate mortgage and leave a balance on higher interest rate debt.

Paying off your mortgage might also leave you without a tax benefit if you’re
in a higher tax bracket and you owe more than 15 years on your mortgage.
You might talk with your tax preparer about the tax implications of
paying off your mortgage early.

It’s important that you don’t skip out on other, smarter financial decisions, just
to pay off your mortgage. For example, if your employer offers a match on
your
401k investments, you should max out the investment. Otherwise, you’re
giving up free money. You also shouldn’t give up paying insurance in lieu of
mortgage prepayment. You need
life insurance to cover your mortgage in
case of your death,
health insurance to offset the cost of expensive medical
bills, and
disability insurance to supplement your income if you suddenly
become disabled.

Early Mortgage Payoff vs. Investing

Before you pay off your mortgage you should weigh the alternatives. What
would happen if, rather than send an extra mortgage payment to the
mortgage lender, you instead invested the money every month. If the
investment has a higher interest rate than your mortgage, you would
ultimately earn more money on the investment than you would have saved
on the mortgage. On the other hand, if your mortgage has a higher interest
rate than investments, it’s better to pay off the mortgage.

For example, let’s say you have 15 years left on a $200,000 mortgage at
6.25%. You decide to put an extra $600 a month toward your mortgage. You
would end up saving $36,574 in interest and your mortgage would be paid
off in just over 8 years. Let’s say at that point you start investing your entire
mortgage payment including the extra $600 for the 6 years you had left on
the mortgage. At the end of 6 years, you would have $173,000 from your
investment.

Consider the alternative of not paying your mortgage off, but investing the extra $600 every month at 8%
for 15 years. You would end up with $209,000. That’s $36,000 more than you would have earned if you’d
paid your mortgage off early.

The investment alternative only works if you consistently invest every month and the interest rate on your
investment is higher than your mortgage. If you’d invested at 5%, you would have missed out on $11,000.

You can use an
online early mortgage pay off calculator if you want to figure out how much you would
save by paying off your mortgage early.
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Early Mortgage Payoff