Early Payoff of a Mortgage: Good or Bad Idea?
Homeowners Must Consider Pros and Cons of Accelerated Payments
Jun 25, 2009
In these challenging economic times, American consumers are frequently admonished to be financially responsible, cut out unnecessary expenditures, and save more as a hedge against an uncertain future. Homeowners may wonder whether paying off their mortgages ahead of schedule is a way to do all three things at the same time.
There is no one-size-fits-all answer, but there are guidelines.
Financial Responsibility; Pros/Cons of Early Mortgage Payoff
On the Web site of the National Endowment for Financial Education (NEFE), NEFE president and CEO Ted Beck stresses the need for Americans to understand and adapt to the changing economic realities and to become more responsible for their own financial well being. In an e-mail to this reporter in April 2009, NEFE spokesman Paul D. Golden explained, “Being financially responsible means protecting the money you earn, living within your means, planning for the future, and using credit responsibly.”
That is why Golden advises that, when deciding whether to pay off a mortgage early, homeowners consider:
- how long they plan to stay in their homes
- whether they are on track with their retirement saving goals
- whether they have adequate coverage for all of their insurance needs
- whether they have paid off other debts, such as credit card balances and car loans
- whether they have an emergency fund
A popular and simple way to chip away at the mortgage balance is to include an extra sum in the monthly payment and clearly earmark it for principal reduction. Some homeowners make an entire monthly payment (in extra principal) per year by paying one-half of their regular monthly amount every two weeks.
By some estimates, one extra mortgage payment per year can knock six years off the life of a loan. By searching the words "early mortgage payoff," homeowners can find online calculators for determining how much interest they can save by making extra payments of principal.
In an April 2009 e-mail to this reporter, Andrew Housser, co-CEO of Bills.com in San Mateo, CA, outlined some of the advantages of paying off a mortgage early:
- Extra payments reduce the balance of the loan faster, which significantly lowers the total interest paid over the life of the mortgage.
- Splitting the monthly mortgage payment in two carries the added benefit of paying half the mortgage payment in the middle of the month, which can further lower the total interest paid.
- After the mortgage is paid off, there is the emotional and psychological relief of knowing that one’s home is truly one’s own and that a large monthly payment is a thing of the past.
Although one of the advantages of having a mortgage on a residence is the federal tax deduction for interest payments, Housser noted that, in general, “homeowners find that losing the tax deduction is worth it to eliminate the mortgage.”
Nonetheless, Housser noted that one disadvantage of paying off a mortgage early is the potential short-term financial hardship. The extra funds applied toward the principal is money redirected from a homeowner's discretionary spending, such for entertainment or vacations; it can feel like a sacrifice to give up comforts to which one is accustomed. Other financial experts cite inflation as another factor that weighs against early payoff.
Early Payoff of Mortgage Is Controversial
Financial experts are divided on whether it is advisable to pay off mortgages early. For an example, see this article by Julie Rains, which also gets into figures involved in early payoff.
Ultimately, individual homeowners must decide for themselves whether it makes financial sense to pay off their mortgages early. Because everyone’s tax situation is different, Housser suggests that homeowners consult their tax advisors and carefully consider the costs and benefits of early payoff.
 |
