14 Aug Should I Pay Off My Loan Early?
Clients often ask us if they should pay off their mortgage, home equity, or car loans early. There is certainly no one size fits all answer, but here are some things to consider:
- Think of early payment as “locking in” a guaranteed return on your money. If you have a mortgage with a 4% APR versus a money market account paying a rate near zero, you have a guaranteed 4% return by paying off your loan.
- Loan payoffs can provide you with peace of mind. For most individuals, a mortgage represents their largest monthly payment. Reducing monthly payments can reduce stress and cash flow needs.
- Should an unexpected scenario arise, you would have home equity available to meet those needs.
- Paying off a loan is safe- there is no market risk.
- Retiring a loan early reduces your liquidity- in many markets, it can be difficult to sell a home quickly at the price you want.
- An appropriately sized emergency fund comes first- it shouldn’t be sacrificed to pay off the loan.
- Historically, the stock market has provided returns that outpace mortgage APRs. Therefore, using money to retire a loan may mean missing out on potentially larger return on investment long term.
- Using cash to payoff a loan may reduce your ability to use tax advantaged accounts for savings such as 401(k)s or IRAs which have lifelong benefits.
Under the right circumstances, paying off a loan early can provide substantial benefits, but everyone’s circumstances are different. We recommend speaking to a Certified Financial Planner™ before making a loan payoff decision.