Does it make sense to pay off your mortgage sooner?

If you are a homeowner, the idea of ​​a mortgage that has preoccupied you for decades can be daunting for many people, and it’s only natural that you want to pay off your mortgage as soon as possible.

However, before deciding to use inheritance, raise or savings to pay off your mortgage (or even before deciding to make additional payments), it is important to take a step back and determine if it is right for you financially.

In some cases, the amount of interest you save on the prepayment of your mortgage cannot exceed the amount you would earn if you invested the money elsewhere. On the other hand, it is sometimes not a question of a return on other investments, but rather of reassuring or freeing up the cash flow for other opportunities. Here’s what you need to know to decide if you want to pay off your mortgage sooner.

Do the other investments exceed a mortgage prepayment?

The biggest consideration is whether you pay your mortgage or whether you are investing. What if instead of investing money to get rid of the mortgage sooner, did you invest that money elsewhere?

“Unfortunately, math tells us that investing elsewhere is almost always better than your mortgage,” said Richard Bowen, CPA, and owner of Bowen Accounting in Bakersfield, California. Currently, many mortgages have interest rates of 3.5% to 5.5%. So if the prepayment on your mortgage gets a return that matches your interest rate, that return is somewhat poor. Bowen also notes that you could use the money you would use to prepay your mortgage to buy a property with positive cash flows, such as B. Multi-family real estate or single-family homes that can generate higher long-term returns.

The point is, no one can guarantee you an investment. “You can put your money on the stock market and lose it. You can put your money in real estate and it is not working as well as expected. “However, each option is a risk. Even after paying off your mortgage in advance, house prices can go down and you may suffer a potential loss. Think carefully about the risks you want to take. It is better not to pay your mortgage sooner.

Will all your money be tied to the mortgage?

Before using much of your assets to pay off your mortgage earlier, you should take a look at liquidity. Your home is considered an illiquid asset because it can take months or more for the property to sell and access capital.”If you pay off your mortgage too quickly, you could run out of cash,” said Amanda Thomas, Mission Wealth client advisor. “The type of liquidity you have is also important. You don’t want too much money to be raised in pension funds because you can get high fees if you have to retire earlier. “

 

One approach is to have an emergency fund as well as assets such as stocks, mutual funds, and US government bonds. The United States, bonds and securities available in a taxable investment account. This way you not only have money tied up in tax-privileged retirement accounts and in your home, but also money and other investments that can be quickly converted to cash.

Bowen suggests keeping a mattress to protect yourself for at least six months before considering using a large portion of your cash to prepay your mortgage.

How will you use the money if you don’t pay your mortgage sooner?

Then be realistic about what you are likely to do with this money if you don’t use it to pay off your mortgage sooner. If you don’t invest that money in additional mortgage payments, are you really going to use it to move forward? Bowen points out that it may be a good idea to invest the money in the mortgage prepayment if you’re having trouble keeping the money in the bank.”The right thing to do is do what you will do,” he says. “It all has to do with personal habits. If you still want to spend the extra money, it’s better to put it in your house than to spend it. “