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6 Times When You Are Smart Not to Pay Off Your Mortgage Early

Plenty of homeowners would like to pay off their mortgage early as it is a hassle and a headache. Itis their largest monthly payment and takes out a good chunk out of their budget.

It is understandable as there are many reasons to pay off your mortgage early. It will not only help yousavehundreds (even thousands) in interestbut will also helpyoufeel secure at the thought of owning your own home.

At the same time, there are benefits of not paying your home loan ahead of schedule.

The approach which is better for you will depend on your financial situation and goals. If the following situations apply to you, sticking to your mortgage payment schedule and using the extra cash for other purposes will be the best option.

  • You Do Not Have a Hefty Source of Emergency Cash.

Financial ups and downs are inescapable. Though the house you own free and clear is a significant piece of wealth, it is not something that you can quickly convert into cash in a crisis. It takes months even in a strong market to sell a house. You could secure a home equity loan more quickly but this also will take a few weeks and will put you back into debt with possibly a higher interest rate than you had on your original mortgage.  So, the best way to ensure that you can cover any unexpected expenses like a job loss or medical bills without having to take on new debt is to make sure that you have set aside a healthy “rainy day” fund to cover at least six months’ worth of household expenses. 

  • You Want to Lower Your Tax

Before you decide to reduce your mortgage debt, make sure you have fully funded any tax-advantaged account such as 401(k) or individual retirement accounts(IRAs). According to Patrick Whalen, a certified financial planner at Whalen Financial Planning in Los Angeles “Paying off a mortgage early competes with the priorities that can help lower your taxes, like funding a 401(k) plan up to the maximum amount.”

The tax advantages of these contributions coupled with the potential for long-time growth in your retirement investments makes them the first place you should be stowing any extra cash you have.

  • Is There A Prepayment Penalty On Your Mortgage?

Prepayment penalties are rare in new mortgage contracts but some older mortgages containrequirements that you must pay several thousand dollars if your mortgage loan is paid off ahead of schedule.

Prepayment penaltiescould be the equivalent of a certain number of monthly interest payments or equal to a percentage of the mortgage loan amount. So, if your mortgage loan contains such a prepay penalty clause you should compare the penalty amount with what you will save in interest by paying off the loan early. You should make sure that you do not lose money by triggering a penalty.

  • You Can Earn a Better Rate By Investing

The smartest choice to make when you have extra cash to pay off a mortgage loan with a low-interest rate is putting it into the stock market or mutual funds and building up a diversified portfolio. It is reasonable to expect a long-term return of 6 to 8 percent when you invest in a broader market.Meanwhile, your mortgage rate may be around 4.5%, so over time you are likely to earn better returns on your money and can benefit from years of tax breaks and be much better off in the long haul.

  • You Have Other Debt

The mortgage loan should be the last debt you pay off. If you are payingother debt that has higher interest rate such as car loans, school loans, credit card debt or home equity lines of credit, it is technically better to put any extra funds towards these debts than your mortgage.

Many of these debts can carry 0%interest at least for a time. However, in most cases, these 0% deals apply to either temporary or relatively short term loans. So, paying off these loans should always be a higher priority than your mortgage loan.  

  • You Are Still Savings For Big Purchases

It is not enough to only pay off debt and save before tackling the mortgage, you should make sure all your future cash needs are addressed. Generally, you should plan to cover all significant expenditure for at least the next five years or preferably for ten years that include:

  • Child’s education
  • Home remodeling,
  • Car purchase
  • Wedding
  • Vacations

There is no point of paying off a mortgage early if you are getting into more debt for a large purchase.

HOW WOULD PAYING OFF YOUR MORTGAGE LOAN AFFECT YOUR CREDIT SCORES?

They will not be a dramatic change in your credit scoreas a consequence of closing your mortgage loan. But closing credit cards can hurt your credit score as it reduces the total amount available to you to borrow. Mortgage loans like paid off student loans and auto loans will remain on your credit reports for 10 years as a “closed account in good standing.”

FINAL WORD

 Whether you should pay off your mortgage early or not depends on how much money you have to spare, what other alternatives you have and other factors that are unique to you. If paying off your mortgage loan early is on your radar you should seriously consider all your options so that you are sure it is the best path forward for you. 

Rapid Rescoring Can Help Raise Your Credit Scores Quickly

When you apply for a loan, a credit card or any other form of
credit, every point in your credit score counts. So, you may
want to consider boosting your credit score before applying
for any type of credit as even a few points added can make a
large difference. With a higher credit score, you can save on
fees, annual percentage rates, higher bonuses, and perks.
There are many things that you can do to improve your credit
score over time, but credit bureaus often do not make the
relevant adjustments for several months. So if you do not have
the time to wait for creditors and credit reporting agencies to
update your scores, especially if your credit score is just
below the range to qualify for a large loan like a mortgage you
can consider rapid rescoring.
What is Rapid Rescoring?
Rapid rescoring is a service offered by some lenders,
including banks and credit unions to make updates to your
credit reports. The goal is to improve and update the
information in your credit reports considerably quicker than if
you were to work directly with the credit bureaus. Normally it
takes 30-60 days but with rapid rescoring, you can update
your credit within 3-5 days. By reflecting the most recent
positive information your credit score will increase to meet
the time-sensitive aspects of a low-cost loan.

How it can help you?
A rapid rescore is best used when your credit score is within a
few points of qualifying for a large loan, credit card or any
form of credit. It will ensure that your entire credit profile is
completely updated and ready for any loan application
process. Your updated credit score will also result in a
significant difference in the interest rate available to you.
The rapid rescoring process is fairly predictable as lenders
generally use simulator beforehand to see how the update
would affect your credit score. According to Adam Carroll,
Chief Education Officer at National Financial Educators, “A
0.5%-1% difference in interest rate may not seem much when
you are not looking at long term costs. But, every single
percentage that you can decrease means massive amounts in
savings later on.”
For example, say your current credit score will get you a
4.75% interest rate on a typical 30-year fixed-rate loan of
$250,000 and after rapid rescoring, your new credit score
qualifies you a 4.25% rate. Then this can help you save you
$74 a month or $26,737 over the life of your loan. You can
use online calculators to calculate the exact difference in your
case.
When it may not work
A rapid rescore does not raise your credit score alone but
rather updates your current credit profile. So, it will not work
if have recently missed a credit card payment, closed out a

line of credit, had a raise in hard inquiries, or any other form
of negative entry.
Rapid rescoring will also not work if the reporting creditor
does not acknowledge the item in question is a mistake. For
example, if you dispute a late payment and the creditor has no
record of timely payment or you cannot prove it then the
lender will not even attempt a rapid rescore.
It isn’t Magic
To succeed with rapid rescoring you need to participate in the
process. For example, if you are late on payments you will
have to pay up and get it to your lender before you order an
updated credit score. Likewise, you would also collect the
documentation to prove that the accounts were paid up. This
takes time and effort and you cannot depend on your lender to
do all the work.
Are there fees involved?
Rapid rescoring is a service provided by your lender or
mortgage broker and typically you do not have to pay a
separate fee for the service under the federal law (FCRA).
But nothing comes for free, so sometimes there may be a
small fee involved in using the service or even if they do not
charge you will be paying for your lender’s capabilities in the
interest rate and closing costs that you pay. However, in the
long run, this service can save you much more money than
what you pay.
Plan Ahead

Would it not be better to have one less thing to worry about
when you are in the middle of a stressful and complicated
transaction? Rapid rescoring does help fix inaccuracies
quickly. But ideally, if you check your credit reports
regularly, fix errors and keep your credit card balances low
you will have nothing to fix the next time you apply for a live