Should I Pay Off My Mortgage Early

Should I Pay Off My Mortgage Early – In this opinion piece, Wharton finance professor Michael R. Roberts examines whether homeowners should refinance instead of paying off mortgages in the current economic climate.

More than two years ago, I suggested that people should think twice about their mortgage payments. Readers’ comments are uplifting and thought-provoking. Since then, inflation has risen and interest rates have risen, which raises the question: what does this new economic climate mean for mortgage payments? I would like to answer this question again and in doing so, look at some things that I did not mention in my previous article.

Should I Pay Off My Mortgage Early

The decision to pay off your mortgage on time depends largely on whether the opportunity cost is more or less than the amount of the mortgage. Two years ago, when interest rates on savings deposits were close to zero, this opportunity cost was lower than most mortgage rates. Therefore, homeowners must take risks and look long-term to justify turning the money into cash instead of paying cash.

How To Pay Off Your Mortgage Early

Well, the price per capita increased over the previous year. In its efforts to fight inflation, the monetary policy of the Fed has increased the federal funds rate by 5% since March 2022. Today, May 2023, we can invest in Treasury bonds, which give more than 4.5% . Many high-income savings accounts and CDs also offer more than 4.5%.

If your mortgage rate is less than 4.5%, say 3.0%, then paying your mortgage on time is giving up more money.

Guard. The 3.0% interest rate you save is worth more than the 4.5% you can get even after taxes. Savings accounts, CDs and Treasury bills are guaranteed by the US federal government, while your home equity is not.

You may lose your job (or be forced to work at a lower salary) and your ability to pay. Therefore, you may lose your home. Paying off loans quickly eliminates high costs and reduces these concerns.

Creative Ways To Pay Off Your Mortgage Early

Example 1: You use extra cash to pay your mortgage early and quit your job. Unless you want to repeat

A few months until the sheriff fired him was a bad idea. Why? You have no money. You have nothing to pay for – office, maintenance, taxes, groceries, health care. So you can enjoy your rent-free home for a few months while you wait out the bad weather, don’t order anything, and brush up on your hunting skills to get the family food. (Happily, this won’t last long because the government will eventually evict you and sell your home because of the tax lien.

What about the value of the whole house? To get it, you have two options. You can take out the loan, which will happen

Has the same issue as the first mortgage, and that defeats the purpose of paying the mortgage on time. Alternatively, you can sell the house, but that defeats the purpose of paying the mortgage on time to keep the house. Even worse, if you are forced to sell your home, you should expect it to be a seller’s market, incurring all the costs associated with selling (seller’s commission, mortgage and title fees). , etc.), and don’t let your financial problems affect you. you. bad. your art. Negotiate the market price.

How Much Can You Save By Paying Off Your Mortgage Early?

Second example: You save your money and have money to help you when you are looking for a job or a better job. Even better, because your money earns more interest than the mortgage costs you, you still

More money than you will get if you pay off your mortgage at a time when you are unlucky in the real estate market of an area where the value of your home has increased significantly. Finally, since you have the money to pay off your mortgage, you will be able to keep the house or not be forced to sell it under foreclosure.

The point of this comparison is that the decision to pay off your mortgage quickly is not a choice between keeping the house or not keeping it if you are laid off or have another major shock. The choice is between locking up money in bad and risky assets, paying off loans with low interest rates, or saving money in good investments, with high interest and liquidity. It is difficult to argue, because of money, in favor of the first.

“If we want to get the spiritual benefit – whatever it may be – of paying the loan on time, we must also consider the financial costs: reduced return on investment, loss of income and high risk. ” Point 2: Paying my bills on time reduces interest

Should You Pay Off Your Mortgage Or Invest?

Paying off your loan on time lowers the interest you pay over the life of the loan. This idea is also behind the argument in favor of short term loans.

For example, a $500,000 mortgage at 5% over 30 years has a monthly payment of about $2,684. Over 30 years you will pay a total of $966,279 or $466,279 in interest. A 15-year loan with monthly payments of $3,954 and interest over the life of the loan amounts to $211,714 for a tangible savings of $254,565! Okay, but that number and the math behind it doesn’t make sense unless your savings plan is hiding money under your bed.

Interest in dollars 30 years from now will be lower than interest in dollars today because of opportunity cost. How much? At the current savings rate of 4.5%, a dollar of interest 30 years from now is worth $0.27 today. Adding the money you pay (or earn) at different times is less effective than adding different amounts. We will not invest 100 US dollars. and 100 pounds sterling and we say that we have 200 “money”.

Therefore, owners must understand the cost of money. If we save money today and the interest rate is higher than the amount of our mortgage, we will get it

Should You Pay Off Your Mortgage Early? Here’s Why Or Why Not

The way to save, I recommend. It is better to save than to lose. However, in doing so, you run the risk of becoming diversified and powerless, locking your money at home. (Of course, these are problems that can happen regardless of why you’re paying off your mortgage so quickly.)

If we’ve learned anything in the past 15 years, it’s that the real estate market can be volatile, especially at the regional level. If most or all of your wealth is tied up in your home, you are at greater risk of having a low return. But as mentioned above, if you need money, it is not easy or cheap to get it at home.

Therefore, the justification of paying a mortgage that forces you to save reverses the argument that there is a significant psychological benefit to paying a mortgage.

The idea of ​​not paying your mortgage every month appeals to many people, including me. It is easy to understand the benefits of reducing the stress of being in debt, and I will be the first to do so. However, if we get the psychological benefits – whatever they may be – of paying the loan on time, we will also consider the financial costs: reduced return on investment, loss of income and increased risk. .

Should I Pay My Mortgage Off Early?

Having liquid reserves available to deal with unexpected negative financial shocks (such as job loss) and catastrophic losses (such as health) is just as important, if not more so, than being “liability free”. .”

In short, for many homeowners with mortgage rates below the current interest rate for a good investment, saving money brings an important financial benefit that should be considered before turning more money to pay off your debt.

The Federal Deposit Insurance Corporation pays deposits up to $250,000, although the failure of Silicon Valley Bank suggests that the government may be willing to protect all deposits, including savings accounts and CDs. little financial knowledge. monthly income. Deciding what to do with your savings is entirely up to you, but many homeowners find themselves in a unique situation: pay off or invest.

There is no one-size-fits-all approach to investing in real estate, and the decision to accelerate your mortgage payment is yours alone. However, it is good to consider the benefits of both options. You don’t know which decision will be right for you until you do a little research. Read on for more information on the benefits of choosing to invest or pay off a mortgage.

What To Know If You Pay Off Your Mortgage Early

[Thinking about investing in real estate? Sign up for a free online real estate class and learn how to start investing in real estate. ]

Paying rent is a difficult task for many homeowners, which is why they often jump at the chance to do it. However, when turning over the money needed to pay off a 30-year mortgage, many homeowners may find themselves in a once-in-a-lifetime opportunity: investing.

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