Today’s post comes from Jennifer Riner of Zillow. Enjoy!
Without mortgages, most individuals wouldn’t be able to afford the homes they live in today. Face it – very few people have hundreds of thousands of dollars lying around to purchase property outright. Mortgages allow the majority of Americans to become homeowners without winning the lottery.
Although they help aspiring proprietors fulfill their dreams, mortgages, much like rent, can be extremely burdening. The interest rate borrowers must pay above the cost of their homes is just one disadvantage. Therefore, many homeowners look forward to the day that their mortgages are fully paid off to live in their homes free and clear. Some even expedite this process by prepaying the principal on the mortgage and diminish the overall interest owed.
To determine whether you should prepay your mortgage, consider the following advantages and disadvantages.
Benefits of Prepaying Your Mortgage
Prepaying your mortgage is liberating because you are free from your loan sooner than expected. Being a mortgage-free homeowner is a milestone that some people never reach, mostly because they move before their loan term is complete.
Without a monthly mortgage, you can purchase a second property and rent it out to subsidize the new loan, or spend your extra monthly cash on leisure activities such as travel. As a mortgage-free homeowner, the only thing you have to worry about paying regularly is your property taxes and utilities. As long as you have the extra cash, an emergency fund and no outstanding debt, prepaying your mortgage makes a great deal of financial sense.
Drawbacks of Prepaying Your Mortgage
The biggest disadvantage for prepaying your mortgage is that you then cannot spend your money on other investments or activities. If you have kids, you might instead consider setting up an education fund. Or, perhaps consider investing in more real estate. Either way, once you prepay your mortgage, you can’t get that money back.
Be sure to set up an emergency fund before you prepay your mortgage to reduce the chance of financial distress in case of unexpected illness or a costly accident.
If you prepay your mortgage while in debt, you aren’t doing yourself a favor in the long run. Credit cards have much higher interest rates than the typical mortgage does, so paying credit cards down as soon as possible is more financially savvy than prepaying your mortgage.
The decision to prepay your mortgage and rid yourself of monthly payments sooner than your loan term is an individual one. No two homeowners are alike in their financial situation, and depending on your personal portfolio, you might want to allocate funds elsewhere. As long as you keep up with your mortgage payments as outlined in your contract, you’re in good shape.
