Is it worth paying off the mortgage loan early?

Making the decision to pay off your mortgage early can make or break your personal finances. While for some it will make more sense, from an economic perspective, for others it may not work out the way they expect.

We know it's not a simple decision, so we'll try to review several scenarios.

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Consider your options first

Pay off mortgage loan earlyBefore you commit a good amount of money to finishing paying off your mortgage loan, you have to sit down and think a bit. During this process, you have 2 main options:

  • Yes. Having this debt is something that concerns me and I'd like to get out of it as soon as possible so I can focus on investing in other projects that interest me.
  • No. Since my interest rate is so low, I have a fixed monthly payment, and the payment is tax deductible, there is no rush. Maybe it will be better to invest that money in the stock market or other instruments that will give me a profit.

In these scenarios you also have to consider the current state of your finances. The ideal situation in any case would be to have no high interest debts, to have an emergency fund and to have started putting money aside for the golden years.

If none of these things have been met, it may not be time to get out of your mortgage loan early.

Reasons to pay off your mortgage loan early

Assuming your situation is manageable, your salary has improved or you just received an inheritance, it may make more sense to take this step. This would also be reasonable when you lose your partner and get insurance money.

If you can't afford the monthly payments on your own, you might consider paying off such a debt outright.

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The main reasons for getting out of a mortgage loan early are essentially 2:

Few people regret paying off their debts.

The psychological and emotional benefits of not having a commitment of this magnitude hanging over your head are good reasons. No matter how low the interest rate, you are eliminating the monthly payment and getting a guaranteed return on your investment.

Since investing in the market is a risk that many are not willing to take, it is preferable to focus on paying off the mortgage and getting peace of mind.

Investing in the stock market has its risks

The big argument against paying off a mortgage loan early is that you can get more for your money if you invest it in stocks. According to the figures, the last 90 years this market has had an average return of 8%.

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However, the periodic crises reveal the possibility of losing a lot of money. The problem is that if you decide to have a portfolio and they take away 25 or 50% of your capital, you will still have the mortgage, which is not a good combination.

Reasons for not advancing the mortgage payment

The arguments against are several and are related to something we mentioned above: creating the conditions for the mortgage payment to be financially justified. With this in mind, it would not be the right decision if:

  • You still have debts. Mortgage loan should be taken care of last, because it is the cheapest. You should take care of other loans first, such as credit cards, car loans, student loans, home equity lines of credit, and any that have higher interest rates.
  • You are not saving 20% of your income. Before you decide to prepay your mortgage, you should be saving this proportion of what you earn. This will be set aside to create a one-year fund for liquidity and in IRA accounts to secure your retirement.
  • You continue to save for certain events. In addition to paying off your debts, there are some major expenses to consider over the next 5 to 10 years. This may include children's education, buying a car, a wedding, vacations and more.

Recommendations before paying off your mortgage loan early

Based on the above, getting out of the mortgage early involves:

  • Focus on other projects. Make sure you take care of your home, car, education and savings needs before committing your money to the mortgage.
  • Have an emergency fund. It's always a good idea to have some extra liquidity available if you plan to pay off your mortgage early.
  • Consider bi-weekly payments. Through this scheme, you can put extra money that represents an extra month in a year of payment, speeding up the liquidation process.
  • Check for penalties. If paying in advance involves a fee, do the math to find out how much it could affect your plan.
  • Evaluate mortgage refinancing. By switching from a 30-year to a 15-year mortgage, you can save interest but pay higher installments.

Whether to pay your mortgage early depends on your finances and how you value your peace of mind. At Busconómico we support you with the advice of our experts and the best mortgage alternatives.

Español: ¿Merece la pena pagar la hipoteca de forma anticipada?