Should you pay off your mortgage earlier than 25 years?
The answer depends on a few factors. Firstly, if you have liquid investments, it would depend on what yield they were earning. If mortgage interest rates are much lower as they are today, it makes sense to keep your money in the bank instead of using it to pay off your mortgage. You could lose thousands of dollars of investment gains.
Secondly, if that is not an option, you can simply use the privileges within your mortgage contract to significantly reduce your amortization period and satisfy your financial goals.
What many borrowers don’t consider is just by changing payment frequency and adding extra money to their payment, their amortization period can shrink dramatically. So for example, if payments are set to monthly mortgage payments, by changing to a weekly or bi-weekly, accelerated payment, can have huge benefits.
Many borrowers are often interested in a line of credit because it's flexible. They appreciate the fact that if they needed to pay it out entirely or make a lump sum payment down the road, they would not be charged a penalty. This is true, however, secured lines of credit usually come with higher mortgage rates.
In reality, and in my experience, most people who have high balances on their line or who are ‘maxed out’, find it difficult to pay them off completely or make extra payments. They end up making monthly payments at a higher interest rate and lose money.
On the other hand, to help with personal finance, I offer closed mortgages that have a pre-payment privilege of up to 20%, and in some cases even 25%, per year. This means that borrowers can pay 20% of their original principal balance without a penalty. On a $500,000 mortgage, that's $100,000 each year without penalty. This approach allows borrowers to make a principal and interest payment while still being afforded the privileges of a "semi-open" credit product. In most cases, this is a sound, long term solution.
Of course in a closed mortgage, a borrower cannot access funds like they would in a line of credit. That's why it's important to set up your credit products with your plans in mind and work with a mortgage broker. I often work with borrowers to segment their credit product to what makes sense.
For example, having a larger closed mortgage portion and a smaller line of credit portion that is manageable while still being able to pay off their mortgage sooner.
In conclusion, the answer is YES you should pay off your mortgage as quickly as you can. Always speak and work with a professional.
Have a mortgage question? PM me on Facebook or call 647-773-4849. Buying a home? Need to consolidate costly credit cards? Call today or visit www.coluccimortgages.com
Sarah A. Colucci
Sr. Mortgage Agent, Lic. M14000929
Mortgage Edge, FSCO Broker #10680
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By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929