Paying Off a Mortgage Early: Good or Bad Idea?

Should Your Pay Off Your Mortgage Early?

Should Your Pay Off Your Mortgage Early?

Prioritizing Early Mortgage Payoff

I would love NOT to have a mortgage payment. Wouldn’t you? The sense of freedom, satisfaction, and security would be great.

But is prioritizing an early mortgage payoff the right thing for your family’s budget? That all depends on where you find yourself financially. There are a few other pressing financial goals you should achieve before you start putting extra dollars towards your early mortgage payoff.

In this blog post we’ll go over short and long-term financial goals we should prioritize in our budget before considering an early mortgage payoff, as well as, reasons why being mortgage free is a great long-term goal.

Financial Priorities Before You Tackle Your Mortgage

Quick Cash for Emergencies

Once you are able to live within your means (spending less than you earn), you should focus on setting aside a certain amount of money, $1000 for example, for immediate emergencies. Once you achieve that, build a 30-day fund so you are always one month ahead financially.

Here is a  step-by-step approach to building your emergency fund.

Prepare for 3 Months of No Income

Now that you have some cash set aside to cover immediate needs, your next step should focus on building a minimum of 3 months supply to cover all of your monthly expenses, including debt obligations.

Why do we say a minimum? In today’s economy it may take much longer than 3 months for you to find a job, hence you should eventually get to the point of having 6-9 months of living expenses set aside.

If you are ready to tackle this goal, here is a guide to building your 90-day fund.

Wipe Out Your Consumer Debt First

Your consumer debt, like credit cards, car loans, student loans, etc., will usually carry a much higher interest rate than your mortgage. You should wipe out all of your consumer debt before you start setting funds aside for an early mortgage payoff.

Fund Your Retirement

Being mortgage free should definitely be a part of your retirement strategy, but it should not be THE retirement strategy. Once you are free from all of your consumer debts and have a minimum of 3 months of living expenses set aside, you should plan on investing a good part of your “extra” cash into some form of retirement. Whether it’s a traditional IRA or a ROTH IRA, find a plan that suits you best and start building your retirement nest-egg.  Make sure that your investment risk is appropriate for your age. The younger you are the more daring you can be with your investment portfolio. If you are older, your investments should be more conservative in order to protect you as much as possible.

Paying Off Your Mortgage

Now we are finally ready to start focusing on the mortgage. There are quite a few ways to “skin the cat” when it comes to a mortgage payoff. You could opt to make large additional payments on your principal every time you pay your mortgage. Or you could choose one of these 3 low cost ways to becoming mortgage free.

How about using your home to generate additional revenue? If you have a basement, rent it out! If your kids are grown and on their own, consider renting one or two rooms out to local college students. Be creative in using your home to help earn extra cash that you can put towards your mortgage payoff.

Reason to Pay Off Your Mortgage Early

Peace of Mind & Cashflow

Knowing that you don’t have to make another mortgage payment ever surely does offer great peace of mind. Knowing that you, not a bank or a credit union, own your home is a great feeling and this reality creates much more freedom for you when it comes to your monthly expenses. Mortgage is most likely the largest part of your monthly budget, hence not having to pay that amount gives you enormous flexibility.

Inheritance for Your Children

If you want your home to serve as an inheritance for your children, then having it completely paid off will allow you to do just that. Be sure to educate yourself on inheritance tax and how to maximize your retirement, be it a home or cash, in order to make the most of your assets.

You’re Counting on a Reverse Mortgage

Those who are considering a reverse mortgage in order to generate income from their home will receive more if their house is paid off. The lump sum of cash available to you through a reverse mortgage will be much larger than if you still owed money to your mortgage provider.

If you’re feeling the lure of a reverse mortgage, here are five things to consider:

 1.    Too often, a reverse mortgage is seen as an easy way out. Make absolutely sure it’s necessary, and not something you’re doing just to increase discretionary spending.

 2.    The younger you are, the higher relative cost you’ll pay for a reverse mortgage. While the upfront fees are the same, you’ll receive a lower monthly payment and smaller lump sum when opting for reverse mortgage at age 65 versus 75 or 85.  So try to avoid taking out a reverse mortgage while you’re in your 60’s.

 3.    Discuss the loan’s pros and cons with your family (especially if you were hoping to leave your home to heirs). Consider your health, as well as, how long you plan to live in the home or area.

 4.    Beware of scams that charge thousands of dollars for information you can very easily get free from the Department of Housing and Urban Development (HUD).

 5.    Finally, there are quite a few options for reverse mortgages. Some offers are better than others, so do your research and don’t settle for the first one that comes your way.

 As you can see, paying off your mortgage is a great goal to have, but it needs to be carefully prioritized as part of your overall financial strategy. Having enough liquid assets on hand should be your primary focus.