Traditional wisdom encourages you to pay off your mortgage faster by taking a 15-year mortgage instead of 30 years, or by paying an additional principal amount each month. However, these actions have risks. If you encounter financial difficulties and don’t have an emergency (reserve) fund, you could face foreclosure. Be sure your emergency fund has enough to cover several months of mortgage payments to avoid losing your home.
Some financial advisors suggest that if your reserve fund earns a rate greater than your mortgage rate (also taking into account tax benefits), you may decide to invest rather than pay down your mortgage. This approach could give more flexibility when encountering an economic downturn, which might include refinancing your mortgage at a lower interest rate.
Also, beware of organizations promising to help you make additional mortgage payments. You can do this on your own, without the fee they will likely charge.
For additional information on paying off your mortgage early, click here.
- Have students talk to others about the benefits and drawbacks of paying off a mortgage early.
- Have students develop a visual to compare paying off a mortgage early with saving and investing additional funds instead.
- What are the benefits and drawbacks of paying off a mortgage early?
- Describe actions to take when trying to decide if to pay off a mortgage early.