5 Quick Reasons for Not Paying Off Your Mortgage Early

5 Reasons Why You Shouldnt Pay Off Your Mortgage Early-150x150Paying off your mortgage early sounds appealing and in some cases is a good choice, but there are several reasons you shouldn’t do it. Depending on your financial situation, it may be more beneficial for you to keep paying your mortgage month to month, as it was agreed upon. Of course, paying it off early will rid you of a very large monthly bill. But if you have other debt, or don’t have any other savings, this move can interfere with other areas of your financial situation, making your life harder. Here are the most important reasons why paying off your mortgage early is not recommended.

Reasons to Not Pay Your Mortgage Off Early

  1. You have other debt. Because interest rates on consumer loans, such as a car loan or a credit card are much higher, it is recommended that you pay those off first. For example, it would be to your advantage to pay off a loan that has a 15 percent interest rate before paying off your mortgage which has a 5 percent interest rate. Your mortgage interest may be tax deductible, unlike interest on a credit card debt. So, before you even start to consider paying off your mortgage early, make sure that you have paid your other debts.
  2. You will be left without savings. Paying off your mortgage early will make things easier for you because you won’t have that large monthly payment to worry about anymore. But if this leaves you with no savings, this puts you at great risk in the event of a job loss or illness. Also, you could use that money to beef up your retirement savings, or start a college fund for your children.
  3. You won’t be earning interest on that money. Paying off your mortgage early will earn you zero return. Placing that money into a savings or retirement account will earn you money over time. It won’t be a significant amount of money, but it will still be better than paying off your mortgage and earning nothing.
  4. There’s a chance that you will move in the near future. This mostly depends on each individual or family, but studies have shown that most people live in a house for 5 to 7 years. Paying off a mortgage early if you don’t plan on living in the home for more than 30 years is not very beneficial. If you are selling your home after only a few years, you will get back all the money that you paid each month.
  5. Inflation will make your overall loan value cheaper. Because inflation rises a few percent per year, as time goes on, your mortgage loan will become cheaper. The monthly mortgage payment that you made this month won’t have the same value as it will 15 years from now. As prices for everything increase over time, your mortgage payment will remain the same.

Paying off your mortgage also has a few advantages, the most important being that you will have more peace of mind. Not having to worry about that large monthly bill and being free of debt can make your life a lot easier. But, many times, doing the opposite and not paying off your mortgage early can be very beneficial as well. Investing that money into something else, or simply using your money for something else, can have more financial advantages than simply paying off your mortgage early. This decision largely depends on each person’s financial situation and future plans, so it is very important to understand what paying off your mortgage involves before going down that road.

Paying Off Your Mortgage Early? Watch Out for Penalties!

Paying Off Your Mortgage Early- Watch Out for Penalties-150x150One of the many things to take into consideration when applying for a mortgage is the fact that, if you plan on paying off your mortgage before the loan term is up, you may have to pay a prepayment penalty. When taking out a mortgage loan, many home buyers tend not to think too far in the future, and so a prepayment penalty clause on the loan contract may go unnoticed at the time of the closing. After a few years, if the home owner decides to refinance or even pay off the mortgage loan, the prepayment penalty may come as a surprise and possibly interfere with his plans.

What is a Prepayment Penalty?

If your mortgage has a prepayment penalty, it means that you will be required to pay a specified penalty to your lender, if you decide on paying off your mortgage earlier than the term that was agreed upon.

In some cases, home owners choose to pay off their loan before the end of its term because they have come across a large amount of money and don’t want to make monthly mortgage payments anymore. But in most cases, home owners choose to prepay their mortgage loan because they have found a better loan from a different lender, with a lower interest rate. Usually, when interest rates decrease, a significant number of home owners choose to refinance, which makes prepayment numbers increase.

If you are not sure if there is a prepayment penalty on your mortgage, the easiest way to find out is by finding the paperwork from when you took out the loan and look for the mortgage note. The mortgage note is a document that promises to repay an amount of money and interest at the specified time, and also includes the prepayment penalty clause.

Prepayment penalties are not necessarily a bad thing. Agreeing to a prepayment penalty can result in a lower interest rate on your loan. Prepayment penalties are bad if you don’t realize that they are included in your mortgage contract at the time of the closing, and end up interfering with your plans and budget in the future.

How Can Paying Off Your Mortgage Early Hurt You?

Some mortgage loans only have short term prepayment penalties, but others have penalties that can be in effect for up to 3 to 5 years. Most people refinance their mortgages before then, so prepayment penalties end up hurting them financially, making the refinance process very expensive, and sometimes even impossible.

There is a type of prepayment penalty called a soft prepayment penalty which only goes into effect if you refinance. You won’t have to pay a penalty if you sell your home, but, unfortunately, most prepayment penalties are the type that will affect both events.

Lowering Your Prepayment Penalty

Prepayment penalties may seem like just a tactic to rob you of some money, but they are legitimate, and will come back to haunt you at the worst of times, if you haven’t been paying attention when you closed on your mortgage loan. Fortunately, there are ways in which this penalty can be lowered.

Check the contract and read the fine print. Find out if there is a prepayment penalty clause in your contract and what it entails. Some prepayment penalties require you to pay a single fee, while others are based on how long you have made payments on your loan. The percent difference between getting out of a mortgage loan after one year or after 4 years translates into thousands of dollars. If you are close to reaching a threshold, then waiting a few months is not a bad idea, and it will save you a significant amount of money.

Contact the lender and start negotiating. You will probably have to speak to a few people before finding the employee who has the power to help you, or at least answer your questions, so don’t give up after talking to the first person who answers. There’s a strong chance that your prepayment penalty will be reduced if you politely present your case and ask for a reduction. Make sure that you make note of everyone you spoke to, and try to get the prepayment penalty reduction in writing.

A prepayment penalty can be a very unpleasant surprise at a time when you have taken some important decisions, like paying off your mortgage loan or refinancing. Making sure that you thoroughly read all the documents required at closing before signing them will save you a lot of trouble in the next several years. Also, remember that prepayment penalties are not a bad choice if you are trying to reduce the cost of your loan. A lower interest rate acquired by agreeing to a prepayment penalty will save you a significant amount of money over time.