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“What to Know About Paying Off Your Mortgage Early”: Is it wise to pay off a mortgage early? When is this a good idea and when is it not? What should homeowners know about early payment?
Karen Kostiw says…
“Is it wise to pay off a mortgage early?
This is a very personal question, but there are some boxes that must be checked even before one considers to pay off their mortgage early. The most important being, would you have enough cash reserves to cover all expenses for at least 2 years after paying off the mortgage. You do not want to be put into a position of paying off your mortgage, then losing your job and incurring an unexpected medical expense. At that time, you would be unlikely to get a new mortgage and would be forced to sell your home to cover unexpected expenses.
When is this a good idea and when is it not?
Presuming one has ample cash reserves after paying off their mortgage, it comes down to opportunity cost. If one has a low interest rate mortgage and can use those funds for investments earning greater than the mortgage interest rate, then you should not pay off your mortgage and use those funds as a low cost loan for your higher returning investments.
On the other hand, if you are a very conservative investor and have your savings in a low return savings account, then paying off your mortgage makes sense as your mortgage rate is most likely higher than your investments rate of return.
What should homeowners know about early payment?
One must be aware of many factors such as the direction of interest rates, mortgage interest expense deductibility rules and the effect on income taxes, ability to be approved for a new mortgage if one would be needed at some point in the future, timeframe expected to stay in current home, and any mortgage pre-payment penalties.” –Karen Kostiw