Paying a mortgage can be such a hassle. Imagine writing that check every month, knowing that part of it goes to the interest only. That’s why many homeowners feel it’s better to pay off the mortgage once they have the money. If they have gotten wind of an inheritance, they won prize money, they got a raise from work, or they got a bonus from work, they think about putting all that money into the mortgage. Somehow, in their minds, they believe this will help pay off the loan faster.
Sure, making more payments than necessary enables you to finish the loan faster. Maybe you’ll slash about four years off your 25-year-term loan. But here’s the thing: you are also losing a lot of opportunities to make money right now by using your extra money to pay off the loan faster.
Think about it. You will have to wait 25 years before you’re free from the mortgage. Even if you cut off four years from that loan, those are still 21 years of waiting before you start to save for retirement. This means you will be stuck in the same old job for 21 years because you struggle to make the repayments.
What’s the Right Move?
The only reason you should renegotiate and revisit your loan term is if you’re going for a mortgage refinancing. And the only way for that to happen is to find a better loan term with a lower interest that will enable you to pay off your loans cheaper and faster. Otherwise, you would be better sticking with your original loan term.
Every dollar you spend on paying off your loan is a dollar you cannot spend on anything else. Isn’t it enough that you’re putting more than $1,500 on it a month? Why should you put an extra $200 or $500? Don’t you have other things to save up for?
Saving Emergency Fund Is More Important
Paying off your mortgage is important, but do you know what else is important? It’s having an emergency fund. If you have no emergency fund because you’re putting your extra money into mortgage repayments, one financial disaster can knock you down. What happens if there’s something you have to financially take care of? Or, what happens if you lose your job and couldn’t make the monthly payments because you don’t have the extra money?
Remember that even if you make extra payments every month, your due dates will still stick. The bank will not adjust the monthly due dates of your loan because you were making extra payment when you have the money. It is still more practical to have an emergency fund that you can tap in case you lose your job or had to pay something more important.
Investing Your Money Somewhere Else Is More Profitable
Putting your money elsewhere—such as the stock market or a business venture—will gain more profit. It will make you more financially stable and independent. Over time, you will have more ability to pay off the loans faster. But first, you have to use any extra money you have to think of a source of passive income or an investment that could earn you money in the future.
Paying the mortgage four years earlier is not an investment. Paying it off with your inheritance money isn’t an investment, too. It signifies the opportunity you lost to make more money. Investing any extra money you have will earn more than waiting 20 years to finish the loan and putting that $1,500 a month in your savings account.
Paying the Mortgage Gets Cheaper Over Time Because of Inflation
Inflation doesn’t make paying off the loan early a good strategy. Over time, as the inflation rate increases, the monthly payments you make for the loan will become cheaper. It will form a small part of your monthly income, too, as you get a salary raise or earn extra from your investments.
Assuming the inflation rate of 2% annually, the $1,500 you pay now every month will equal to just $942 in 25 years. That monthly payment will get more affordable as the years go by. Even if you don’t make extra payments, you will find it easier to pay the mortgage off as you earn more and take better care of your other finances.
Plenty of people are so worried about the mortgage payments they make every month. They forget to focus on more important things, such as having an emergency fund and saving for retirement. While paying off the mortgage loan earlier is a goal for everyone, saving and investment are the better priorities.