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When you take out a mortgage to buy a home, it usually takes decades to repay your loan. In fact, the 30-year mortgage loan is especially popular even though it has a long payoff time.
You do have the option to pay off your loan in less time, though. You could choose a shorter payoff term, such as a 20-year or a 15-year loan. These tend to come with reduced interest rates along with the shorter payoff time. Or you could opt for a 30-year mortgage and just pay extra each month in order to pay it off faster.
With either approach, there's a tradeoff that you're going to need to make. You will have to make higher monthly payments if you want to get your debt paid down sooner. On the other hand, the longer you take to repay your loan, the less you'll pay each month. But that means your loan will cost more over time.
So, the big question to ask yourself is whether it's worth paying more every month to become debt-free sooner.
Is It Worth Making Higher Monthly Mortgage Payments to Be Debt Free Faster?
The advantages of higher monthly mortgage payments
Becoming free of your mortgage debt sooner has several benefits, including:
Saved interest costs:
When you pay interest for less time, that's more money for you instead of the mortgage lender.
More financial flexibility:
When you don't have a mortgage payment to make, you can do what you like with your money. Once you no longer have this major monthly obligation, you have more options in life like working less or switching to a lower paying job.
Peace of mind:
You'll know that you own your home free and clear and don't have to worry about the bank foreclosing.
See it: U.S Mortgage Rates Fall for the First Time in 9-Weeks
The downside to paying more each month
Unfortunately, the benefits of paying off your debt sooner come at a big cost. Namely, when you make those extra monthly payments to repay your debt, you won't be able to do other things with that money. And that has consequences. For example:
You're missing out on other
opportunities: Mortgage interest rates are still really low. Since your return on investment (ROI) when paying off your mortgage is simply the interest you save, that means you're getting a low rate of return. Chances are good you could get a much better ROI by investing in the stock market. You could also miss out on tax breaks for investing if you aren't maxing out your 401(k) and IRA because you're paying higher monthly mortgage payments.
Since there are advantages and disadvantages to both options, you'll need to carefully consider which approach is best. If you're disciplined enough to invest your money, you could end up in a financially better position by keeping your mortgage payments low and investing the extra you would have paid toward your home.
But you may decide the peace of mind of having a paid-off house is worth the cost that comes with devoting extra cash to a low-interest loan. If you make that choice, just be aware of the downsides so you can make the decision with both eyes open.
A historic opportunity to potentially save thousands on your mortgage
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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Source: fool.com