Updated February 3, 2019 . AmFam Team
If you’re like most homeowners, you had to take out a mortgage in order to purchase your home. With that mortgage, you’ll be paying the agreed upon price of your home plus interest over your loan’s term. And while mortgages are generally considered “good debt” — that is, relatively low-interest (most of the time) — no one really likes to pay interest.
So if you’re in a financial position to do so and the conditions of your mortgage are right, you’d be smart to consider paying it off early. Here are some strategies on how you can save money and get that debt off your back,
While getting rid of your debt as soon as possible always seems like a great idea, there are some scenarios in which it can put you in a bad spot. Consider these topics and find out if mortgage pre-payment is right for you:
Mortgage pre-payment penalties. Some mortgages have pre-payment penalties built in — some will include penalties for refinancing your loan (in which you pay off your current mortgage by replacing it with another loan), some will penalize you for selling your home and some include both. There may be other conditions, too.
Most penalties will only be triggered if you pay over a certain percentage of your balance in a particular month. Talk to your lender and get all the details about your home loan and any restrictions and penalties it has.
Other debts. If you have other debt that carries higher interest on a significant balance, re-consider your prepayment plans. Things like student loans, car loans and credit card debt generally carry higher interest rates, so go over your finances, make sure you’re not missing any payments and tackle that bad debt first.
You have other things to save for. If you haven’t saved money to cover emergencies, or if making any extra payments would diminish your quality of life and make handling your finances especially difficult, consider holding off on the pre-payment. Sometimes, saving money in the long run isn’t worth the financial, emotional and personal stress that a money crunch would cause.
Taxes. You may be able to deduct your mortgage interest from your taxes — but if you pay off your mortgage early, your bottom-line might not be as simple as it looks. Talk with your accountant or financial advisor to see what kinds of effects paying your mortgage off early will have come tax day.
Investments. If you think your money could be better spent in another investment, like stocks, other real estate or another business venture, you could put your money towards those instead. Make sure you understand the risk and know that there’s no such thing as a surefire investment. If your return on investment is higher than your mortgage interest rate, you’ll know you made the right decision.
Now that you’ve gone over your finances, spoken with your financial advisor and talked to your mortgage lender about any side effects of mortgage pre-payment, it’s time to get into the details of how you’re going to do it. Consider these methods:
Refinance your mortgage. Refinancing doesn’t mean you just replace your current loan with one that has a better interest rate and keep paying it off on schedule. While you can do that, consider shortening the term or making larger payments in combination with refinancing your mortgage to pay it off sooner.
Make an extra payment. Just one extra payment per year will do wonders for mortgage balance — depending on your interest rate and term, it could actually shave years off your debt and save you thousands in the process.
Let your financial situation dictate how many extra payments you make — if you can afford to make more than one per year, go for it. You’ll thank yourself down the line.
Save, save, save. No matter how big of a financial windfall you’ve just gotten, being careful and responsible with your money is key to pre-paying your mortgage. And if you haven’t had an influx of funds, it’s even more important. Trim the unnecessary expenses from your budget and put more in your savings each month — you’ll have at least a little bit of money to make a big difference in your loan balance.
Regardless of whether you’re four payments away from paying your home off or 29 years, you deserve the peace of mind that homeowners insurance offers. Get in touch with your American Family Insurance agent (Opens in a new tab) and see how we can protect you, your property and your livelihood.