Paying off a Utah home loan—whether you want to own your house outright or pursue mortgage refinancing —early is one of the surefire ways to prepare for a stress-free retirement. After all, nobody wants to enter their sunset years, a period when one’s income is usually no longer as high as it used to be, dealing with mortgage debt.
However, not everyone who prepays a home loan in full necessarily wants to own a house free and clear. Furthermore, mortgage prepayment is not entirely advantageous. If you are planning to take this route, you might unknowingly compromise your finances in the long run.
Below are the usual negative consequences of fast-tracking the maturity of your mortgage.
Making Your Cash Illiquid
Conventional wisdom says that owning a house is not throwing money away. This belief can hold since a piece of real estate is an asset. It has value, and you can sell it and turn a profit if you want to.
The more you reduce your principal balance, the amount that represents how much you still owe on your house, the more your property becomes yours and the less your lender’s stake in it.
Some experts might even say that a house is a forced-savings instrument. Your principal payment turns into home equity, which is a form of wealth you can tap to get cash if needed. In other words, a portion of your monthly payment, in a manner of speaking, still goes into your pocket.
There is one problem, though: illiquidity. Unlike other assets that you can easily convert into actual money you can spend to buy and pay for stuff, a house takes several days at best to get sold. In case of emergency, you can’t turn to your home equity to access a bunch of funds instantly.
Paying your mortgage more than what you are supposed to means tying your money into an illiquid. Prepayment might ultimately increase your net worth in the end, but it can render you cash-poor.
Slowing the Growth of Your Wealth
Ironically, making extra mortgage payments in hopes of reducing your liabilities can actually affect the size of your wealth. Houses, like other assets, are prone to price fluctuations due to economic forces.
Making small additional payments regularly or lump-sum ones occasionally does not guarantee wealth buildup. If the real estate market goes sour, your home equity could vanish before you realize what happened.
If you want to think of your house more as a store of wealth and less as a means of housing security, avoid putting all of your money in it. Place your eggs in different baskets to have a cushion against market crashes and help keep your wealth intact.
Hurting Your Credit
Paying off a home loan via a refi can harm your credit in two ways because you are basically replacing debt with another. Taking out a mortgage triggers a hard inquiry and decreases the average age of your credit accounts.
Your FICO scores can recover as your credit history stabilizes. But you will have to deal with the implications of being less creditworthy in the meantime.
Mortgage prepayment is key to absolute homeownership. It has more downsides than you might think, but its ultimate merits are usually worth the trouble.