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3 Alternatives to Paying Off Your Mortgage
The feeling you get from finally paying off your mortgage is a liberating one. The desire to free yourself of loan repayments makes it incredibly enticing to put any extra cash you have towards paying off your mortgage as soon as possible. After all, who doesn’t want to own their home outright?
Yet, there are several alternatives to paying off your mortgage early that could be a financially smarter decision. Depending on your financial position and your life goals, it might be in your best interest to actually postpone your home repayments.
Alternative 1: Pay Off Other Higher Interest Debt
If you have higher interest debt, such as credit card debt, personal loans, or automobile loans, repaying these balances should take priority. As mortgages are secured against your home, their interest rates are generally lower compared to other forms of debt.
Alternative 2: Increase Your Home’s Value
Sometimes you may find yourself in a situation where your home’s current value has fallen below the purchase price. In such situations, it may be better to put your money towards major home improvement projects that can increase the value of your home. For example, if a $50,000 renovation can increase your home’s value by $100,000, then it would be wiser to accommodate that renovation than to reduce your mortgage balance by the same amount. There is no exact formula for determining how much value a particular renovation would add to a home as there are simply too many individual factors. Some guides suggest that to ensure you are not investing more than your house is worth, you should spend about 10%-15% of the house’s value on the kitchen and 10% on the master bathroom suite.
Alternative 3: Invest in Higher Yielding Assets
Because mortgages tend to have the lowest interest rates of all types of debt, it can be wise to direct your money into investments that can give you a higher yield compared to your mortgage. For instance, if the all-in interest rate you are paying on your mortgage is 5%, then money would be better spent on investments that can yield above 5%. This is especially true if your primary goal is saving for retirement. If you are considering such investments, it’s best to first consult with a financial specialist.
Funding Such Alternatives Using Your Home’s Equity
Assuming you’ve thought through each of these alternatives thoroughly before concluding they are the right financial choice for you, one of the best ways to fund such alternatives is using a Home Equity Line of Credit or a HELOC.
A HELOC gives you a flexible line of credit based on your home equity. Your home equity is its market value minus your mortgage balance. The amount of credit you can get using a HELOC depends on loan-to-value ratios.
A HELOC is particularly valuable when used for undertaking a home improvement project. This is because under the new tax laws, interest paid on HELOCs is tax-deductible if they are used to buy, build or substantially improve the taxpayer’s home.
Important Considerations Before Taking Out a HELOC
While HELOCs are a powerful tool that can be used to improve your financial future, they must be used prudently. Prior to the financial crisis of 2007-2008, many homeowners used HELOCs almost as an ATM or credit card. When the real estate market crashed, many of these HELOCs went underwater and the homeowners found themselves unable to repay their debts.
This is a very important consideration because a HELOC is secured against your home, which is why interest rates are typically lower than other types of loans. Failure to repay a HELOC is the equivalent of failing to repay a mortgage and could result in foreclosure. As such, a HELOC should never be taken out without careful consideration, so be sure that you are confident in your ability to repay the loan.
Is a HELOC Right for You?
Borrowing against your home equity is a valuable option that can help secure your financial future, but it should not be taken lightly. If you are still unsure whether taking out a HELOC or a home equity loan is right for you, Citadel is here to help. Contact a Citadel Mortgage Specialist to discuss your options today.
Photo Credits: Shutterstock / Rawpixel, Shutterstock / Monkey Business Images
