One thought that always bugs homeowners is should I invest my surplus capital or pay off my mortgage faster?

It might be beneficial for those with a high-interest rate to repay their home loan faster. But it's important to look at both sides of the argument before making a decision.

So in this article, we’ll discuss the pros and cons of paying off your home faster to help you make a decision. Let’s begin!

The Pros of Paying Off Your Home Faster

It saves money on interestis it worth paying off your home faster?

Every monthly payment of your mortgage will have a small chunk that goes towards interest. This means the fewer payments you make, the lesser you will pay in interest.

So if you have extra capital, make extra mortgage payments to reduce the amount of interest paid on your home loan. This can be especially beneficial if you are in a high-interest bracket.

Just remember to make it clear to your lender that the extra payments should go towards your principal amount and not the monthly payments. You can use an online calculator to determine how much you can save on interest if you pay off your loan early. 

It allows you to get early homeownership

Financial ups and downs are a part of life. If your finances hit a rough patch, it becomes difficult to continuously make your monthly mortgage payments. And although minor, there’s always a chance that you could become a defaulter and your house be foreclosed.

Paying off your mortgage sooner can give you an immense sense of relief, knowing that you no longer owe a debt to the bank and the house is entirely yours.

There’s no pressure of monthly payments

Paying off your home mortgage sooner means that you reduce the term of your loan, and there are no more monthly financial obligations to deal with. This gives you the financial freedom to manage your monthly expenses better and allows you to add a monthly amount to your savings or explore ways to invest your money.

The Cons of Paying Off Your Home Faster

While the above arguments clearly favor paying off your home loan faster, some arguments suggest otherwise. So, let's factor in the cons now.

You might not have enough money left to invest

Paying your mortgage faster can drain your surplus cash amount and deprive you of lucrative investment opportunities.

Moreover, the percentage you save on interest is significantly lower than the returns that some business investments, stocks, or real estate assets might offer.

This is why most people feel better off investing their surplus money in a diversified portfolio rather than paying their home mortgage faster. Plus, having extra money for emergency use inspires a sense of security.

Here’s some advice on how much to save for your emergency fund.

You might face penalties

Some banks charge a penalty for breaking your home loan before the tenure is over. This really defeats the purpose of getting rid of debt and opting for early homeownership.

This is a common mistake people make out of ignorance. Read this article to learn about the mistakes to avoid when paying off your mortgage early.

Surprisingly, the penalties for early or late payouts can amount to thousands of dollars. This also highlights the importance of asking your lender about the fine print before finalizing a home mortgage deal.

It could negatively affect your credit score

Many people don't fully understand how credit scores are determined. Besides payment history, they depend on many other factors and one of those is the “credit mix.”

What's that? It is simply the compound of your loans or credits at any given time. These can be your student loan, credit card, car loan, and house mortgage.

This means your credit mix positively impacts your overall credit score when creditors see you paying regular monthly mortgage payments.

So when you pay off your home mortgage earlier, it drops from the credit mix and your credit score takes a hit. If you decide to pay off your mortgage earlier and your credit score suffers, here are some ways to improve it

Remember, you’ll need a good credit score when applying for a mortgage in the future.

You might lose the mortgage interest tax deduction

Being a homeowner gives you the perk of claiming a tax deduction from your income against the amount of interest you pay in monthly mortgage payments. When you pay your mortgage sooner, you lose this benefit.

Final Thoughts on paying off your home faster

So should you pay your house mortgage faster?

Looking at the pros and cons of it, the answer is different for everybody. It depends on your personal preference, financial circumstances, and the conditions of your mortgage deal.

It is surely a good idea if you can do it without incurring penalties or giving up financial flexibility. But if you have investment plans that offer a good return on investments, it might be better to go with those.

We have listed the pros and cons in detail; identify your case, and be the judge.

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