There are certainly disadvantages to paying off the mortgage early, but today we will discuss the reasons why it may make sense to pay off the mortgage early.
1/. Interest savings
On a 30 year mortgage, it is quite common to pay just as much in interest as you do on the principal. In essence, after 30 years you would have paid for your house twice. A $500,000 house may end up costing 1 million.
Paying the principal early can mean tens, or even hundreds of thousands of dollars in savings. You can use my Excel mortgage calculator to find out how much you can save with extra payments.
2/. Guaranteed rate of return
With a mortgage you know exactly what your interest rate is. If it is 5%, that means any money spent to pay down the mortgage will have a return of 5%.
Investments such as stocks may return more, or they may not. They are not guaranteed. Knowing what you are getting from your contributions is a big plus for many.
As mortgage interest rates increase, the better your savings will be.
3/. Peace of mind
Even if someone were to potentially earn more money elsewhere, they may still want to pay off the mortgage for peace of mind. For some people, peace of mind is so important they can not put a price on this.
Such a person hates having debt hanging over their head and would do anything to eliminate it. Their life would be much better and healthier for not having that debt.
Someone with that mentality would benefit greatly from paying off the mortgage quickly.
4/. Security
If you lose your job and have a paid off mortgage, then that is one less expense you will need to worry about during such hard times.
You don’t have to worry about missing payments, because you have none. The bank won’t be able to take the house off you.
5/. Lower expenses
Once your house is paid off, you will greatly reduce your monthly living expenses. By not having a mortgage expense, you won’t be spending so much each month.
This means you can increase your savings rate. You also won’t need as much money to retire.
6/. Forced savings
Some people are terrible savers. If they didn’t have the mortgage to allocate money, they would waste the money on frivolous spending.
For someone like this, paying extra on the mortgage can be a great decision.
There are four ways to pay off a mortgage more quickly.
- Make more frequent payments
- Make larger payments or lump sum payments
- Reduce the term of the loan.
- An optimised loan structure that maximises the use of low interest rates.
Maybe a combination of all four if you really want to send your mortgage repayments into overdrive.
Just check that if you do have a fixed mortgage structure, you may not be able to overpay the mortgage by too much thanks to bank limits. A portion of the mortgage on a variable loan is always advised if your plan is to speed up repayments.
In my next article we will discuss 6 reasons NOT to pay off the mortgage early. It is not such a one sided decision as you may think.
Thanks for reading and stay tuned…….
If you need a personalised plan that makes the most of your housing asset whilst ensuring your individual goals are considered, then get in touch and we may be able to help.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here.