No one likes to be in debt. However, you usually need to take out loans to afford substantial purchases like houses. It can be tempting to pay down your mortgage as fast as possible — but you may want to think twice before you put every penny toward that goal.
Here’s a look at what to consider before you pay off your mortgage.
Why Financial Security Matters First
Before you even think about a mortgage payoff, you need to take a comprehensive look at your finances. Today’s average monthly payment adds up to around $1,500, which tends to be a homeowner’s most significant expense. Though you may want to eliminate that obligation to save money on interest quickly, you need to ensure you’re in the best financial position to do so.
Many experts recommend that homeowners tackle other financial accomplishments before they pay off their mortgage completely. It’s often better to put money toward other expenses to bolster your financial security in the long run. This way, you won’t put yourself in a bad position because you’ve used all your money just to pay off your mortgage.
Here are a few goals you should meet before putting any extra money toward your housing loan.
1. Save for Retirement
Eventually, you’ll want to retire from your job to spend time with friends and family. It’s important to set up a retirement account now so you have several years to prepare for that day. Be sure to establish either a Roth IRA, 401(k) or another retirement account where you can put extra cash.
Keep in mind that how much you save depends on various factors. Therefore, you may need to adjust the amount you put away over time. This fund needs to be at least somewhat established by the time you consider a mortgage payoff so you don’t find yourself at a disadvantage later.
2. Build an Emergency Fund
Additionally, you should always have cash you can access in an emergency. If you suddenly need to make a car repair, you want to have enough set aside to get you back on the road quickly. A few months of living expenses should be the right amount.
3. Target High-Interest Debt
Any debt you have with an interest rate higher than 6.5% should be your priority. These payments are considerable hindrances, so you want to target them before you think about your mortgage. Get your steep credit cards and personal loans handled sooner rather than later.
4. Make a “Want” Purchase
There’s always room to save money for “wants,” as well. For example, you may want to make a few upgrades or renovations to achieve a higher return on investment when you sell your house, such as updating your flooring. If that’s the case, you should set aside cash now so you don’t have to rely on credit. Try the same for cars, weddings and other major investments.
Make sure your financial security remains your top priority. Almost all mortgage professionals agree that homeowners should pay attention to other expenses before they attempt to put extra money toward their housing loans. That’s mainly because you have either 15 or 30 years to tackle your mortgages, and your other financial responsibilities are more urgent.
Should You Pay Off Your Loan Early?
What do you do once you have your ducks in a row? If you have a retirement account, an emergency fund, and no high-interest debt, you may want to put whatever extra money you earn toward your mortgage. That’s a smart idea for a few reasons, but you still want to be cautious.
How Much Extra Money Should You Put Toward Your Mortgage?
Many homeowners think you need hundreds of dollars extra to put a dent in their loan. However, you only have to spend around $50 more each month to see a difference. That’s simply due to how mortgages work. If you stick to the payment schedule, you’ll pay thousands in interest — and even a few additional dollars will reduce that number in the end.
If you’re confident in your finances, you may want to pay more than your mortgage’s minimum monthly payment so you can pay off the loan faster. This extra amount can be whatever makes the most sense budget-wise, whether that’s $100 or $500. It also helps to calculate how effective a certain amount will be in the long run.
Look at your loan as a whole so you can determine what number will work best.
When the Minimum Payment Amount Makes Sense
As stated earlier, you should stick to the minimum payments when you need to put every additional dime toward another expense. If you have $300 to spare at the end of the month, you first want to see whether that money should go into your emergency fund. If you’re looking good on that front, you can then consider tacking more onto the minimum amount.
It may also not be possible to make extra payments on certain loans. Some mortgages come with prepayment penalties, so you may incur a charge when you attempt to pay it off in a specific timeframe. Be sure to check the fine print before making an extra payment.
Either way, you should continue making the minimum payments until you’re sure additional ones are sensible for your financial situation.
Quick Tips for Paying Off a Mortgage Early
If you decide to pay off your mortgage early, you should do so on a biweekly basis. Because there are 52 weeks in a year, you’ll make one more payment on your loan without feeling like you did. It’s a smart trick to make things a bit more manageable.
When you receive your tax refund, you should consider putting that amount toward your mortgage as one full extra payment. Many households get more than $2,000 back after filing their taxes, which usually adds up to more than their monthly mortgage payments. If you set aside your refund for that purpose, you can cut things down even more.
Your Mortgage Payoff Timeline Depends on a Few Variables
While paying off your mortgage can seem like something you want to get done right away, you need to consider that other expenses may be more important. Before you put any extra money toward your mortgage, you need to ensure you’re financially secure. This way, you have all your ducks in a row before you tackle that debt and will be much more prepared to pay it down.
by: Rose Morrison
Rose is the managing editor of Renovated and a real estate industry writer.