When is early payoff a good investment?

There are a few instances when early pay-off is a good investment: if you'll be in the house long-term, if higher interest debts have already been paid off, or if early pay-off will yield a higher return on investment.

First, early pay-off is a good investment if you plan to stay in the house long-term. By long-term, we mean 10 years or longer. Most people pay off a mortgage to reduce the amount of interest they pay. If you only plan to be in your current home for a few years, you won.t save enough in interest for an early pay-off to be worthwhile.

Second, make sure the rest of your financial obligations are taken care of. If, for example, you still have credit card debt, get rid of that first. But if most of your other debt has been paid off, and you have extra money to put towards your mortgage, then - yes, it's a great idea.

The third situation involves Return on Investment (ROI). You need to determine if you could get a better return on your money if you invested it elsewhere.

Let's say, for example, that your interest rate on a 30-year, ,000 mortgage is 7.5%, which translates into about per month or ,400 per year. There's ,000 left to pay off on that mortgage, and you happen to have ,000 burning a hole in your pocket. You do some research and learn that you could earn a 4% annual return, or ,600 by investing the ,000 in a 12-month certificate of deposit. Paying off the mortgage early would save you ,400 per year, while the CD would only make you ,600 per year, so an early payoff makes sense in this case. Note, however, that you also lose the tax deduction on the interest portion of your mortgage payment, so be sure to factor that deduction in when calculating your actual savings from an early payoff.

In short, if your investment can't earn at least 10-20% above your mortgage's interest rate, you are probably better off paying off early.

Because each person.s situation is unique, we recommend consulting with a financial advisor before making a final decision.

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