The pros and cons of paying off a home loan early

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By: tiarajoseph11
on 13th Jan,2016

There are certain advantages and disadvantages of paying off a home loan early. Do you know what they are? If not, then check them out here.

After reading several financial planning books and going through vivid financial planning lessons, now we can understand that paying off the home loan early is a good thing. But, how can you be so sure about it? Very easy, there are a few pros and cons you can find if you decide to pay off your home mortgage early. Let’s view some of those reasons and examine them.

Pay off mortgage early - Points in favor

1. It saves your interest - Paying off a mortgage early can save your thousands of dollars which you’ll be paying as interest payments on the mortgage. The faster you’ll pay off the mortgage upfront, the less interest you’re going to pay. You can pay extra in every installment, so that your capital will reduce quickly, eventually reducing the interest.

2. It reduces risk - Prepaying your house means you are actually reducing your biggest monetary risk once and for all. After completing the house payments, you don’t have to worry anymore about a fixed shelter, even when you become unemployed. You need to pay old bills you have left. You can invest the money in some other ventures that’ll give you good returns in future.

3. You’ll have less stress - Paying a good amount each month for a long period is very stressful. So, as soon as you pay off your home loan, you’ll get rid of your stress and can live a peaceful life. It’s a human psychology that removing debt burden can ease up your daily life, and you’ll feel a lot more free to save, invest, build wealth and give.

4. It’ll help you to take financial decisions - Being a stressful person, you can’t make serious financial decisions. To choose the right path, you need to be focused and calm. But, if you don’t have any major financial burden over your head like a home loan, you can definitely deal with such crucial financial steps like a job change, or planning a tour abroad, or invest in stocks. You can make your own financial moves without worrying, as you don’t have any big debt burden to pay off.

5. It’s like a monetary increment - As you don’t have to pay a large amount as monthly mortgage installment every month, it’s like getting a monetary gain! You can gather the extra money every month and start investing.

Payoff mortgage early - Points in against

1. Flexibility and liquidity - If you don’t prepay the mortgage, you can invest that money in somewhere else and become more liquid in your holdings. You can access your money easily, whether it's a stock or any other kind of investment. This’ll give you the power and flexibility to gather cash at any point of time. But, if you use all your liquid cash in mortgage prepayment, you’ll have no money left to use in an emergency.

2. Higher investment, higher returns - It is a fact, the money you’ll be saving by prepayment of mortgage is obviously lower than the money you have right now, without paying any extra payments for your mortgage. If your expected returns on your investments will be higher than the money you’ll be saving after mortgage pre-paying, investing will be a wise choice for you.

3. No diversification - People may question you that you are engaging all your money in only one type of investment, that is real estate. By not pre-paying mortgage and using that money in other investment types like a mutual fund, stocks or something else will actually diversify your funds.

The argument against pre-paying does really have some points. But, it’s a tough decision to make for every homeowner. But practically, it’s quite motivating to get yourself out of any kind of debt. You may earn some extra dollar by investing that money, but paying more to get more, that’s not any solution.

Check out: 7 Steps to complete home loan process and grab your dream home


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