A mortgage is the biggest debt an average Oklahoman could ever have. Since living debt-free beats being in a deep level of indebtedness for years any day, many of us naturally want to pay off our OKC or Tulsa home loans ASAP.
However, is it wise to prepay your mortgage? The answer is not as straightforward as you think. There are two schools of thought you ought to consider making an informed decision and pick the choice that makes sense to your situation.
Free, Clear, and More
The benefit of owning a house without dealing with a monthly mortgage bill is financial freedom. After all, your loan payment does not only represent what you owe (principal) but also what you pay extra (interest) to borrow the funds to buy your property in the first place.
Once you finished repayment, more money suddenly stays in your pocket every month. Your budget becomes bigger, and your ability to pay with cash turns stronger. Prepayment also translates to less interest paid and more savings, especially when there is no penalty for doing so.
In addition to the tangible advantages of a mortgage-free life, you get to enjoy full home equity and peace of mind. You attain absolute homeownership because your lender no longer has a lien on your house, and the threat of foreclosure is nothing but a memory.
Trapped Money, Devaluation, and Opportunity Cost
Some homeowners are intentionally not in a hurry to pay off their mortgage. Although it is a massive debt that can linger for up to three decades, there is beauty in letting it run its course.
Contrary to popular belief, trying to eliminate a considerable debt like a mortgage can be a waste of cash because of the way money works.
Yes, prepayment accelerates the buildup of home equity, but this form of wealth is illiquid, which is no good until it is converted to actual dollars and increases your bank deposit. Home equity can provide security, but it can’t stop your net worth from diminishing when local property values drop.
Most importantly, choosing to put your extra cash in your mortgage means choosing not to use it elsewhere. Although real estate can be an investment vehicle, others historically have a better reputation for beating inflation. The stock market is one of them.
Tax, Retirement, and Credit
Now, other considerations suggest mortgage prepayment is not as advantageous as you think. For instance, tax deductions. While prepaying your loan can save you on interest, it likewise lessens your mortgage’s tax advantage.
Siphoning your extra money to pay down your financial obligation more quickly rather than beefing up your retirement funds might not be a wise move. Having as many cash reserves as possible to sustain a comfortable lifestyle by the time your income becomes limited is more responsible than using disposable assets to get rid of a debt at the height of your economic prowess.
Finally, trying to pay off your mortgage can surprisingly harm your FICO scores. Once paid off, the account attached to your loan is closed, losing the payment history that comes with in the process. Managing your mortgage along with your credit card bills properly makes you more creditworthy.
Either decision has its own set of pros and cons. If you can’t select which direction to take, know that taking half-measures can produce an even worse result.