When paying off your monthly mortgage payments, you may have wondered if you can make extra payments each month in order to pay off the mortgage early. But is paying off your mortgage early really worth it?
Let us explore the pros and cons of paying off your mortgage early:
By making additional payments to your mortgage’s principal balance, you can help save on interest over time. This happens because the more of the principal amount you pay off, the lower your interest gets as interest is typically higher at the beginning of the loan.
If you are spending a lot of money each month to pay more on your mortgage, then you could lose out on the opportunity to invest in other accounts like your 401(k). Especially if you are using money from your 401(k) to make additional mortgage payments.
It is not always recommended that you use individual retirement plans like your 401(k) to make mortgage payments. That additional income could bump you up into a higher tax bracket, making it to where you will have to pay additional taxes. Not to mention, you will lose out on your total retirement assets and get a decreased rate of return.
When you pay your mortgage off early, it will be one less expense that you will have to pay come retirement. In addition, you will no longer have a large debt and will have built up some equity in your home.
Finally, there are often prepayment penalties attached to your mortgage agreement. This means that you are regulated in how much you are allowed to pay off and when. It may initially seem unfair, but remember that lenders and investors need to protect themselves from loss and prepayment penalties help in that.
But it’s not all gloom. Prepayment penalties can benefit you in that mortgages with a prepayment penalty typically have lower interest rates and can reduce what you pay out-of-pocket on the loan.
When deciding whether or not to pay off your mortgage early, it is essential that you understand the terms of your loan and your unique financial situation. Your personal financial advisor and loan officer will be able to offer their expertise in helping you find the best solution for you.
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