When it comes to financial goals, it can be hard to prioritize when you have more than one. Such is the case when it comes to wanting to pay off debt and also save for a down payment on a home.
While it’s possible to do both at once, it may be more advantageous to prioritize one over the other. Of course, this depends on your own situation, the type of debt you have and what trends in the target housing market are indicating.
Struggling to decide if it’s better to pay off debt or start saving for a down payment? While only you can make the best decision for your situation, this article will help you understand the what to consider when evaluating your options.
When it comes to managing your finances, deciding whether to put extra funds towards paying off your mortgage early or saving that money can be a difficult choice. With the benefits and drawbacks to both options, many homeowners struggle to determine which route is the best fit for their unique situation and long-term goals.
How Paying Off Your Mortgage Early Can Pay Off
Paying off your mortgage ahead of schedule can allow you to:
-
Become debt-free sooner. By putting any extra payments towards your mortgage principal, you’ll be able to pay off your home loan faster and reduce the amount of interest you pay over the life of the loan. This can allow you to become completely debt-free years sooner than if you just made the minimum payments.
-
Build equity faster. When you make additional payments on your mortgage, more of that money goes towards building equity in your home rather than interest. This can allow you to build equity and increase your net worth quicker.
-
Save on interest Interest makes up a significant portion of your monthly mortgage payment. By paying down the principal faster, you reduce the amount of interest you owe over the life of the loan This can lead to thousands of dollars in interest savings.
-
Lower your monthly payments. Once you pay off your mortgage, you’ll no longer have to budget for that monthly mortgage payment. This can give you more room in your budget each month for other goals and expenses.
-
Reduce financial risk. Owning your home outright with no mortgage lowers your financial risk. You reduce the impact of job loss or income changes on your ability to keep your home.
The Benefits of Saving Extra Funds Instead
While becoming mortgage-free may sound appealing, there are some advantages to saving your extra funds instead:
-
You earn interest. Putting extra payments into a savings account allows that money to earn interest for you over time. Even small amounts can grow substantially with compound interest.
-
You have access to the funds. Money you put towards extra mortgage payments is not easily accessible. But money you save can be withdrawn if an unexpected need arises. This provides a safety net.
-
You diversify your assets. Having all your net worth tied up in your home exposes you to market risks. But money you save can be invested in stocks, bonds, retirement accounts, and other assets.
-
You work towards other goals. Maybe you want to save for your child’s education, make home renovations, start investing, or build up a rainy day fund. Saving extra money allows you to work towards multiple financial goals at once.
-
You prepare for end of loan costs. Even after you pay off your mortgage, you’ll still have to pay property taxes and insurance. Saving provides a buffer for these inevitable costs.
Key Factors to Consider
With pros and cons to both options, you’ll want to think through several factors to decide if it’s better to pay off your mortgage early or save extra funds instead:
-
Interest rate on mortgage. The higher your interest rate, the more you can save by making extra payments. Paying off high-interest debt first usually makes the most financial sense.
-
Your loan type. Since some loans have lower rates and more flexibility, like an adjustable-rate mortgage, paying them off early may not need to be a priority.
-
Time remaining. The longer you have left on your mortgage, the more impact extra payments can make. There’s less incentive when you only have a few years left.
-
Your savings. If you already have robust emergency and retirement savings, then putting more towards paying off your home may be reasonable. But if you lack adequate savings, you may want to build those up first.
-
Job security. If you work in an unstable industry, the flexibility and cushion of having savings could make more sense than tying up funds in home equity.
-
Investment opportunities. When investment returns are likely to outpace mortgage rates, you may want to invest extra funds instead of putting them towards your home loan.
-
Your risk tolerance. How comfortable are you with debt? If having a mortgage causes you stress, then eliminating it may be worth prioritizing.
Tips for Finding the Right Balance
Rather than choosing one approach, many financial experts recommend finding the right balance between extra mortgage payments and savings contributions that aligns with your situation. Here are some tips that can help you strike that optimal balance:
-
Start by setting specific savings targets for an emergency fund and retirement. These foundations should be your top priority.
-
Make sure you’re taking full advantage of any 401(k) match from your employer before putting extra money towards housing. That’s free money you don’t want to miss out on.
-
Run the numbers to see how much extra you can afford to put towards your mortgage without sacrificing your lifestyle or other goals. Avoid diverting so much that you live paycheck to paycheck.
-
See if you can negotiate a lower interest rate when you refinance. That can make paying off your mortgage faster more advantageous.
-
Split any extra funds between short-term savings, long-term investments, and extra mortgage payments to maintain diversification while still chipping away at your home loan.
-
Re-evaluate the balance yearly and when life changes occur. Adjust your priorities as needed based on the market, your job outlook, family growth, and other evolving factors.
The Final Word
Determining whether it’s better to pay off your home faster or save any extra income depends entirely on your current financial situation and future goals. There’s no one-size-fits-all approach. Being strategic and maintaining some flexibility is key to pursuing multiple financial goals at once. With an understanding of the trade-offs and a balanced tactic, you can make smart money decisions that optimize your finances both today and for years to come.
:max_bytes(150000):strip_icc()/sick-of-mortgage-payments-pay-off-your-home-early-453826_Final-201fc508b83c4f839d73a7a8bb4d1098.png)
Take the first step toward the right mortgage
Apply online for expert recommendations with real interest rates and payments
Whether you have an emergency fund
Most financial experts recommend maintaining an emergency fund, whether you’re paying off debt or saving for a house. An emergency fund is money that’s easily accessed and saved for unexpected, emergency expenses. It can help prevent you from going into further debt while you pay yours off and will prevent you from dipping into your savings.
When it comes to financial goals, many professionals recommend building an emergency fund first, if you don’t have one already. Some say you should start with $1,000 and others recommend 3 – 6 months’ worth of necessary expenses, like rent, utilities, food, and water. However, the best option is one you’re comfortable with. One way to determine this is by looking at your insurance deductibles. You’ll want to save at least enough money to cover those.
Keep in mind that you’ll want to keep an emergency fund at all times, even after you reach your other financial goals. With maintenance, repairs and other costs that come with owning a house, you’ll want to keep one after purchasing the home, too.
Should You Pay Off Your Mortgage Early or Invest? | Financial Advisor Explains
FAQ
What is the 2% rule for mortgage payoff?
Is there a downside to paying off your house?
- 1) You lose your mortgage interest deduction.
- 2) You lose a low borrowing cost.
- 3) You tie up capital in an illiquid asset.
- 4) You decrease your financial returns.
- 5) You might start being less efficient with your time.
- 6) A chance your credit score might take a hit.
What does Suze Orman say about paying off your mortgage early?
Personal finance guru Suze Orman says it depends. While the possibility of job loss can trigger financial panic, Orman advises against rushing to drain your savings to pay off your mortgage early. Even if you have enough money saved to wipe out your mortgage, don’t pull the emergency cord until absolutely necessary.
Should I prioritize saving or paying off debt?
Paying off credit card debt is pretty much always the first priority, above saving, above investing, above paying down any other debt. And then when you get it paid off, be very careful with your spending to not run it up again.
Do extra mortgage payments save money?
Two things: you pay less in overall interest, and you pay off your loan faster. That’s because the extra payments accelerate paying down the mortgage balance, which in turn reduces interest fees. According to Freddie Mac’s Extra Mortgage Payments Calculator, you’d save $18,828 in total interest by the time you pay off the loan in our example.
Should I pay off my mortgage?
That can be particularly helpful if you are close to retirement or are exploring ways to reduce living expenses. If the interest rate on your mortgage is high: If your mortgage rate is significantly higher than the interest you could receive on a low-risk investment, it may be worth paying off your mortgage, or consider refinancing.
Should I pay off my mortgage in advance?
If you want to save on interest: By paying off your mortgage in advance, you can save thousands of dollars in interest. This can be especially impactful if you are in the early years of your loan, when most of your monthly payment goes towards interest rather than principal.
Should you pay off your house?
You won’t be entirely free of house payments, however: You’ll continue paying homeowners insurance and property taxes. It increases your financial security: Having a paid-off house can help lower your financial stress level. Why?
Should I pay my mortgage or save for retirement?
Paying your mortgage is typically the safer option because, with a fixed monthly payment, you know exactly what you’re going to get. The earlier you can start saving for retirement, the better. This allows you to take advantage of compound interest (earning interest on interest).
How much money can you save on a mortgage?
Instead of investing, you opt to put an extra $300 per month toward your mortgage. Here’s how much time and money you could save based on the loan’s interest rate: Keep in mind: It’s still important to continue contributing to your retirement accounts as you pay down your mortgage debt.