Often times a person will come into a large sum of money through investments or inheritance and will consider whether they should take the opportunity to use the money to pay off their mortgage or perhaps pay it partially down. Whether it is financially smart to do so will depend on the individual situation and in some cases it can be the right thing to do and in others it can be the wrong thing to do. The answer lies with how much debt the homeowner has outside of the mortgage debt.
If mortgage debt is the only debt and the homeowner is capable of paying off the mortgage then the answer is more clear cut that the mortgage should be paid off. The only discussion to hold off would be to consider if the funds used to pay off the mortgage might be better suited to make investments or to maintain as an emergency fund. In most cases, the security of paying off the mortgage would be attractive to the homeowner.
If there is other debt then it must be considered that the debt with the highest interest rate should be paid off first. That is the debt that is costing the homeowner the most. By paying off the highest interest rate debt first, the homeowner is addressing the most expensive debt despite the balance of that debt. Mortgage debt is usually associated with very low levels of interest when compared to most other types of debt such as credit card debt. So, there will likely be more expensive debt than the mortgage debt to pay off first.
Of course, in the long run, if the debt level of the mortgage is very large then even if the interest rate is low, the overall cost could easily be more than the interest cost that is at a higher rate on a smaller level of debt. Also, the amount of time left on the mortgage repayment could cause a low rate interest mortgage to be more costly than a consolidation of other debt that has higher interest rate levels. This of course is another consideration for whether it would be best to address and pay off a mortgage fully, pay it down partially, or pay off other debt, or a pay down combination of mortgage debt and other debt.
There is a good reason for paying down mortgage debt and that is to gain a better rate on a remortgage. By paying down the level of debt in relation to brining it under the value of the property, a homeowner is building up the level of equity on the property. The higher the equity level the better the remortgage deal the homeowner can secure. Better rates and longer terms can be found on a remortgage that involves a high level of equity. Some mortgages may have associated penalty fees that are involved with paying down the mortgage debt early. These fees should be a consideration and a homeowner would want to know exactly what fees would be involved to determine if it were financially smart to pay off the debt with the current mortgage. In some cases it would be better to pay down some of the debt to obtain an attractive remortgage that involves smaller or no fees when paying off the debt early and then paying off the mortgage fully after the remortgage.
There are so many varying factors that can be in play with a particular situation and each homeowner will be facing distinct financial situations that will involve different answers as to whether a pay off of mortgage debt is likely to be a smart move. There is not a concrete answer to whether mortgage debt should be partially or fully paid off and therefore each homeowner will have to take many things into consideration and make their own personal decision.
