It’s the age old question: Should you pay off loans early? Whether it’s a mortgage, a student loan or a car loan, paying off your debt early can give you great peace of mind. The problem is, it’s not always the best financial solution. It’s always good to look at the overall financial picture before you decide to pay off any debt. Here are three times that paying debt early isn’t the best option:
If You Have Other High-Interest Debt
Paying off your mortgage is not worth compromising your other finances. If you have student loan or credit card debt that has a higher interest rate, it’s smarter to pay off that debt before you focus on extra payments to your loan. If you don’t have an emergency fund, then you need to be contributing to that as opposed to paying extra on your mortgage. If an emergency pops up, you may end up paying way more in interest on hospital bills or home repairs if you don’t have an emergency fund. Also, make sure you are contributing a good amount to your retirement each month, especially if your company offers a match program. Don’t sacrifice your retirement for paying off your loan a little early.
If You Can Earn Extra Money
One thing that people don’t realize is that they can make more money with the extra cash instead of paying off a loan early. Although you avoid interest on your mortgage loan, if you can invest that money at a higher interest rate than the mortgage is charging, then you can actually make money while paying off your loan. Look into investment options and compare the interest rate on your mortgage to the interest rate you would earn. If you would earn more by investing, definitely go that route. Need some help with investing? Sites like E*TRADE and TD Ameritrade are known for the help they offer to novice investors, so that would be a good place to start.
Refinance: Another smart options would be to refinance your loan to get a lower interest rate, so you are guaranteed to make money by investing. Not sure what your refinance rate would be? Here is a great refinance tool that can help.
If the Loan Has Prepayment Penalties
Always ask about prepayment penalties before you decide to pay off a loan. Most mortgages, student loans or car loans can have prepayment penalties, which can end up being the exact amount you were supposed to pay if you didn’t pay early. While it’s almost always a bad idea to pay loans with prepayment penalties early, weigh the pros and cons of paying early and make sure that you won’t be wasting any money by doing so. Sometimes peace of mind from settling a debt is more important than money.