Is it Time to Get Rid of that Mortgage Loan?

Buying a new home can be intoxicating. More closet space! Bigger bathrooms! A 3-car garage! Room in the backyard for the always-family-friendly game of yard darts! Later, when the regularity and amount of the mortgage payments sink in, the intoxication can wear off. To some home owners, a 20- or 30-year mortgage may feel like an albatross. The idea of paying interest over that period of time, and paying twice the value for your home (or more!) over that period may have you thinking about re-financing to a shorter-term mortgage, paying extra to take years and interest off the mortgage, or paying the mortgage loan off outright.

For those that have the money available and the inclination, this might be the right strategy. Like most financial concerns, the ultimate decision will be highly personal. But there are some common questions all those looking to re-finance or pay off the mortgage should consider.

What’s the rest of your debt picture?

If you’re carrying a mortgage alongside other debt, chances are that the interest rate on the mortgage is significantly lower than it is on credit card balances, car loans, or personal bank loans. Pay those debts off before you even consider paying off a mortgage early.

What are your cash needs?

Before using all of your available funds to close out a mortgage, look at the amount and liquidity of your investments. Are all of your investments tied up in bonds that won’t mature for another 20 years? Do you have any emergency cash that could cover half a year or more of your monthly expenses, if necessary? Are you investing enough in retirement accounts and your childrens’ education? Financial safety and security might dictate that you should take a less aggressive approach to paying off your entire mortgage.

Is your home a home, or an investment?

If you have the funds available to shorten your mortgage duration (meaning a higher payment over a shorter period of time) or pay if off altogether, many financial experts may argue that you could instead just keep making your current mortgage payment and put those “extra” funds into other investments. Should you? I don’t know. Maybe!

That may seem like a terrible answer, but it’s actually not, because it depends on so many factors—many of which are unique to your own situation. How is the real estate market in your neighborhood, your county, and your state? How are your other investments performing, and can you count on that same level of performance even through the economy’s natural cyclical movements? (Short answer: no.)

If you’re looking at your home strictly as an investment, ask yourself if you’d be willing to leave that home if it appreciates to double or even triple its current value. If so, where will you go? If the market is up that significantly for your home, to make the sale worthwhile, you’d have to purchase a home in a place where real estate values are going in the opposite direction (and how smart of an investment is that?).

For most, while a home may very well appreciate and become a good investment, its primary purpose is to be… a home. Don’t think of it in terms of the return you’ll get from it, and don’t expect that your current luck in the nascent field of day-trading will hold up. In many cases, paying off short- and long-term debt when you can, as soon as you can, will be more fruitful than investing that money elsewhere.

What about refinancing?

Although interest rates may be on the rise soon, for now they’re still very low. Borrowers with a good credit history may be able to reduce their payments by refinancing at a lower rate. If you can lower your payment and lower your rate, say from a 30-year mortgage to a 20-year mortgage, that’s an unqualified win. But even if you don’t want to refi, you can cut our long-term borrowing costs significantly just by making a couple extra mortgage payments per year, or by increasing the amount of each payment. (Although it’s increasingly unlikely, make sure you don’t have a pre-payment penalty on your mortgage before paying early.)

Need some extra motivation? Check out this calculator that can help you see how additional principal payments can shorten your loan term and lower the overall interest you’ll pay over the life of the loan.

What will I do with all this peace of mind?

Getting out of debt can be a wonderful feeling, and owning your home outright is a joy in its own. Even after your home is paid off, you’ll still be responsible for property tax and hazard insurance, among other expenses. Paying off a mortgage early isn’t the right move for everyone, but it can make sense given the right financial situation.