In September of 2015, home purchases paid for 100 percent in cash made up only 31.3 percent of transactions in the American market . That means that much more than half the home sales in America for that month required a mortgage.
With the majority of buyers not able to pay everything up front when buying a home, there are those under a mortgage or who are getting a mortgage saying to themselves, “Oh, I’ll just save and pay off the entire mortgage ASAP.” While this is a good goal, there are some reasons why paying off a home loan early is a bad idea.
- Penalty fees – There are some lenders who will charge a penalty fee for paying off a mortgage, or any kind of loan, early. This is because they are missing out on all that extra interest they could be making. While a mortgage will save you lots of money, the interest is what they are charging you for helping you invest in a home. Fortunately, federal home loans do not have penalty fees for early pay-offs, so let’s move on to the next reason.
- Life Costs & Emergencies – Let’s say you saved up $120,000, used it to pay off the remainder of your mortgage and avoided a penalty fee – great! Now let’s say something comes up – a pregnancy, a medical emergency where you needed to pay a percentage of a very expensive surgery, or your car breaks down to the point where it would be less expensive to invest in a new car. You have now tapped out your extra resources in order to pay for your home in full.
Though the mortgage is paid off, you still need to pay for utilities, upkeep and other property costs, so what is going to happen if you can’t afford those? You will need to likely sell the house you just paid off, so hopefully any equity you earned compensates for that new stress you just took on to relocate. Keeping up with monthly mortgage payments will help you keep other money aside, just in case of a rainy day, and you can stay in your home.
- Treat mortgage payments, mentally, like rent – Though a mortgage will likely be less than or equal to what you pay on rent, you are paying this towards home ownership rather than giving it to a landlord for their benefit while waiting for a rent increase or eviction if they decide to sell the property. If you keep that mentality of paying monthly to keep a roof over your head and realize you are not paying that much extra than an apartment would cost, it will help you realize your security. Don’t think about the concept of being “in debt,” but rather that you are paying for an investment that will outlive the mortgage.
- Refinance instead – If you eventually find that the mortgage payment is getting a little high, whether you had a life event that affected your finances or you simply want to save more money, you can apply for a refinance. This process will approve you for a better interest rate, or will help get cash back out of equity on your property. Cash out refinances are also good for the earlier mentioned life events where you may need some extra money. Try going to your landlord and asking to pay less rent or to get cash back from what you paid for rent in the past. Spoiler – it is likely not happening.