You may think that the decision to pay off your mortgage early is a no-brainer and that it is always the best option everyone can take at any given time. Who wouldn’t want to be debt-free, save thousands of dollars in interest charges potentially, and have peace of mind? Unfortunately, if we look at the bigger picture, the situation isn’t as straightforward as we think it is, especially in the Singapore real estate market. Going the payoff route has drawbacks, too. There are a series of considerations you should make, so you need to weigh out all of your options. In this article, we will discuss the pros and cons of paying off your mortgage earlier than your payment completion schedule.
Advantages of Paying Off Your Mortgage Early
If you have the budget to fully pay your mortgage, there are some real benefits to it. Some of these advantages include the following:
You save money on interest over time.
Paying the mortgage off early could save you significantly on interest costs depending on your balance and how long you have left on your loan. The sooner you pay off your loan, the bigger the savings.
You will be debt-free sooner.
Having debt and knowing you must make monthly payments can be stressful. Conversely, if you decide to pay off your loans early, you will have the peace of mind of knowing you’re debt-free and that your income is yours to spend as you desire. It can also give you a lot of flexibility to do things with your money later in life.
It frees up cash.
Paying off your mortgage can free up a lot of cash. Instead of making hefty monthly payments, you can use those funds in other investments that are potentially higher-earning. You could also pay off debts such as credit card debt that could be costing you a significant amount in interest.
You will get a guaranteed ROI.
You get a guaranteed return on your investment when you repay your mortgage early. You’ll save on interest costs. There’ll be no risk with the money you use to pay off your mortgage, unlike if you purchase stocks, cryptocurrency, or other assets that come with inherent risks.
Disadvantages of Early Mortgage Payment
On the other hand, early payment also has a few downsides. Consider the following disadvantages before you finish paying your mortgage.
There are investment options with higher interest rates.
If you have an investment option that gives higher interest than your mortgage, it is always a good idea to invest rather than pay down your mortgage loan. Also, when your wealth is locked up in a single asset, like your property, you are at greater risk during a down-cycle in the property market. You shouldn’t use all your cash to pay off your home loan mortgage early.
You may be charged a prepayment penalty.
If you pay off your loan too early, some lenders charge fees because it affects their ability to make a profit. The fees vary, but they are generally a small percentage of the outstanding loan balance. Check with your mortgage lenders if you’re planning on paying off your loan in full.
Your only ROI is saved interest.
Your only guaranteed return when you pay off your mortgage early is the interest you save. Mortgages typically have low-interest rates, so all that you’ll get as a return on your money is this measly percentage of your loan a year.
There’s a cost of opportunity you may lose.
When you make extra payments toward paying off your mortgage early, you cannot do anything else with that money as a result. If you decide you need that money back for other things, it might be impossible to get it back.
It can be tempting to pay off your mortgage early, especially if you have the funds readily available. You reduce your total interest payments and your monthly spending needs while you have the psychological benefits of knowing you are out of debt. For most people, however, early mortgage payoffs may not be the best choice. The ROI is low, and you could make better investments rather than taking up a significant portion of your net worth in an illiquid asset that is time-consuming to sell.
A smart option you could explore is a cash-out refinance, which turns your home equity into cash, allowing you to use your equity for virtually any purpose. If you’re not sure whether paying off your mortgage early is the right decision, consider consulting with a financial adviser who can help you determine the best move forward. At Smart Mortgage SG, we have a team of experienced mortgage consultants who are ready to help people in making important financial decisions in terms of real estate loans and payments. Contact us now, and let’s discuss your mortgage situation and how we can help.