Mortgages > FHA

Should you pay off your mortgage early?

Many savvy homeowners know that making one extra mortgage payment per year, or paying an amount above that due each month, can save thousands of dollars in interest rates over the life of a mortgage.  But is it always a good idea to pay off your mortgage early?  Before you decide to fork over those extra funds, there are a number of factors you should consider. They include:

What is the interest rate on your mortgage? If the rate is low, say 5 or 6 percent, as rates are for many mortgages initiated in the last couple of years, consider whether investing the funds you would pay toward the mortgage will give you a better return..

Will your investment yield a reliable return? If you are paying a 5 percent interest rate on your mortgage and can invest funds in bonds with an 8 percent yield, you’d do better investing the funds and paying off the mortgage when the income you receive on your investment exceeds the principal remaining on your mortgage. If your funds are invested in stocks, however, and you are unsure whether the interest rate will be higher than that of your mortgage rate, consider paying down the mortgage instead.

Is asset liquidity important to you? That is, is it necessary  to have cash at your disposal? When you apply extra money to your mortgage, that money is no longer available to you in an emergency – unless, of course, you can successfully apply for a home equity loan.  Consider whether an more liquid asset would suit your financial needs.

What are the age and specifics of your financial needs? If you are older and less inclined to take risks with stocks, but bond interest rates are low, you might consider  an “investment “ in the extra principal of your 6 percent mortgage to be a good deal.

• Consider the benefits of mortgage interest deductions on your tax return. While income from stocks and bonds is often taxable, your mortgage interest can be deducted from your federal tax return. Sometimes the cost of the mortgage is lower than it seems, once you consider the tax benefits.

When in doubt, consult your accountant. Compare the outstanding principal remaining on your mortgage  with the potential for return on an investment during the same period of time. Factor in the tax benefits and liabilities. Make an informed choice.


The tips on this website should be considered food for thought only. Lendingtips.com is a clearinghouse of ideas, not a professional adviser. Before any important decision, please consult the appropriate professionals (lawyer, accountant, real estate agency, broker etc.).