Paying off debt early is often a smart move. But not always.
In fact, if you have one specific type of loan – mortgage – then there are many reasons why you might not want to repay it earlier than the scheduled repayment date.
If you thought about trying repay a mortgage ahead of scheduleconsider both the three big disadvantages and the two benefits of this financial step.
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Three big disadvantages of early repayment of mortgages
When it comes to the biggest disadvantages of making additional mortgage payments, there are three things to keep in mind.
1. Early repayment of the loan is associated with additional costs
In conditions of a limited money supply, the decision to early repay the mortgage means refusing to use this money for other purposes. This decision could be a missed opportunity to do several things, including:
2. You will get low returns.
If you pay off any debt ahead of schedule, you receive the accrued interest. Mortgage rates usually very low, especially when compared to other types of debt. In fact, in recent months, many people have been able to get a 30 year fixed rate mortgage at a rate of about 3% or less.
This means that paying off your mortgage early gives you a fairly low rate of return. This is especially true if you think you can invest in S&P 500 Index a fund that can generate about 10% of the average annual return on investment (ROI).
3. You could lose your mortgage interest tax deduction.
If you provide details when filing your tax return, you will likely deduct the interest paid on your mortgage. This means that your interest payments do not reduce your taxable income as much, and some of them are subsidized by the government. If you pay off your mortgage early, you will lose this deduction and your income tax bill may go up.
Two big benefits of early mortgage repayment
While these three disadvantages are definitely worth considering, there are also two big advantages – paying off your mortgage loan early. And you also have to consider this.
1. You will save on interest
Obviously, if you pay off your mortgage quickly, you will be paying interest in a shorter period of time. By shortening that time and reducing interest costs, you are saving more money in your pocket, rather than sending it to your creditors. The sooner you pay off the loan, the more you will save on interest.
2. You will receive the freedom associated with the absence of debt.
Once your mortgage is paid off, you have one less monthly bill to worry about. You can redirect this money to other purposes. Or you can start living on a lower income, which will give you the opportunity to work less.
Ultimately, you will have to decide if these advantages outweigh the disadvantages. For some people, the savings on interest and the psychological benefit of not being in debt make paying off your mortgage early the right choice.
For others, the opportunity cost is simply too high, and they find it better to redirect their money elsewhere, paying only the minimum on their loans. Only you can decide which of these groups you fall into.