Most people who plan to stay in their home dream of the day that they can burn their mortgage. Imagine the luxury of living in a house that is owned free and clear of any debt. There is no doubt that it will provide some security and reduce monthly fixed costs. Of course, the faster a mortgage gets payed off, the less overall interest payments there are that need to be paid. It might seem that paying off a mortgage quickly is always a sound financial decision, but in this current lending climate that may not be true.
Is it Always Smart to Pay a Mortgage Off Early?
People who already have plenty of money, financial security, and of course, good credit scores might consider paying a mortgage off early in some cases. This could be particularly true if the home’s owner feels certain that good times will last. However, there are a couple of things to consider before deciding to apply extra money to mortgage payments or simply paying off the note with a lump sum of cash.
What is the opportunity cost of using cash to pay off a mortgage? Most borrowers these days enjoy fairly low interest rates on their mortgages. If there is a chance that spending the cash to pay off the home loan would make the homeowner miss another opportunity or have to take out a high-rate loan, it may not make a lot of sense.
What is the credit rating of the homeowners? If the homeowner has any reason to believe that his or her financial state may not stay rosy, it is probably a good idea to hold onto cash. According to Equifax, one of the large U.S. credit bureaus, subprime home equity loans are very tough t get and quite rate. It will be hard for homeowners with credit challenges to change their minds and cash equity out of their homes later.
The idea of having a home without a mortgage is attractive. However, it is one of those decisions that could be tough to reverse later. Also, some people may have better uses for their cash. There isn’t one best answer for everybody, but it is one of those choices that should be considered carefully.