If you own your own home you may love the idea of one day paying off your mortgage. Not only will the house be yours free-and-clear, but the money you currently use to make your mortgage payments could be used for other things like retirement savings, your child’s college tuition, even a dream vacation.
While there are multiple ways you can go about paying off your mortgage early (we’ll take a deeper dive into that later) it’s not necessarily the right financial move for everyone. For example, if you have a lot of student loan or credit card debt at a higher interest rate, you may want to consider ways to pay down that debt first. Or if you aren’t going to live in your current home for more than a few years, it may behoove you to sock that extra money away for your next down payment or, as we said above, pay down other debt.
Here are five scenarios when paying down your mortgage debt faster can make a lot of sense.
You’re In Your Forever Home
If you have no intentions of moving at any time in the foreseeable future, paying off your mortgage early can save you tens of thousands of dollars in interest over the life of your mortgage loan. It’s literally money in the bank. Keep in mind, though, that your mix of credit accounts can impact your overall credit health. Holding a mortgage can slightly boost your credit, but if your credit already is excellent, this shouldn’t be of great concern.
Your Revolving Debt is Low
If you don’t carry revolving debt like credit card balances, paying more toward your mortgage makes a lot of sense. But if you do, it may make sense for you to pay off your credit cards before you start putting extra money toward your mortgage. Yes, you’re gaining equity in your home the more you pay toward it, but carrying credit card debt can be expensive, not only because of the higher interest rates you pay on your balances compared to your mortgage interest, but also because it can harm your credit. The higher your credit card balances in relation to your credit limits, the lower your credit scores tend to be, and that can hurt you if you ever look to refinance your mortgage or buy a new or second home.
You Get a Windfall
By all means, if you come into a lot of money as the beneficiary of a relative’s estate or other means, paying down a significant amount of your mortgage debt can feel great. Keep in mind you won’t reduce your future payments by doing so (you’d need to refinance in order to do that) but your payoff date will come around more quickly, meaning you’ll pay less interest.
You Want to Use Your Home as an Investment Property
This kind of depends on where you live, how much you’ll be able to make renting your property and other factors. That’s because mortgage interest on rental properties can be written off for tax purposes in most states just as it can be for individuals. So, if you want to reduce your taxable income, you may want to keep that mortgage. However, if you won’t gain any tax benefit, owning your rental property outright can mean you pocket all of the rental income.
You Just Want to Be Debt Free
While the average American carries a little over $130,000 in overall debt, including mortgages, student loans, credit cards and auto loans, a lot of people want to see their own personal figure at $0. If that’s you and your mortgage is next on your list, go for it. We’ve outlined below some of the easiest ways to make that happen.
There’s no one right way to do this, so considering your personal finances and needs is the first step in determining what’s right for you. In general, though, there are four primary ways to easily pay off your mortgage debt faster:
Make bi-weekly mortgage payments.
It may sound silly to split your mortgage payment in half and pay it twice a month instead of once a month, but doing so actually results in the equivalent of making an extra payment toward your mortgage every year because the extra payment goes straight to your principal balance. You’ll want to check your monthly loan statement or talk to your mortgage lender before beginning this process, however, as some mortgages charge penalties for prepayment.
Make a larger mortgage payment.
The same goes for this method. Contact your lender to be sure your extra payments will go toward your principal balance then round up your payment to whatever amount feels comfortable to you. For example, if your mortgage is $1,285 you could pay $1,350 or $1,400 instead and barely feel it. Meanwhile, you’re paying an extra $780 or $1,380 per year toward your principal.
Refinance your home.
If you can refinance your home for an even slightly lower interest rate while getting the lender to cover the closing costs, you can pay down your debt faster even though you’re pushing back your payoff date. Here’s how: By continuing to make your current mortgage payment or even adding a bit to it. Contact your lender or another about whether you can lower your rate enough to make this a feasible option.
Use your tax benefits.
Talk to your financial professional about ways you can benefit from some of the tax deductions you may be eligible for, such as mortgage interest, private mortgage insurance, home office deduction, repairs, etc. These items can potentially save you thousands, and when you get your refund, you can apply it to your mortgage.
[Editorial Disclosure: PayDownMyDebt.com is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]