Homeowners may wonder if they’re carrying too large a mortgage and, if so, how to reduce it. Mortgage sizes tend to vary by generation, so one way to assess whether your mortgage may be oversized given your age is by finding out what the average mortgage for your generation is. Then, if your mortgage is higher than that average, it might make sense to consider paying down the balance more aggressively, as well as finding a way to refinance. Consider working with a financial advisor to ensure your mortgage is covered in your long-term financial plan.
Average Mortgage Balance By Age
Despite the COVID-19 pandemic’s real estate market, Americans have bought homes in record high numbers. Experian’s annual State of Credit report found an increase in mortgage debt across all generations, rising by $13,587 over 2020’s level to a total of $299,242 in 2021. That’s $18,979 more than the average amount in 2019. However, not every generation shares the same amount mortgage debt. Here is the latest mortgage debt breakdown by generation, as calculated by Experian:
- Generation Z (16-24): $192,276
- Millennials (25-40): $255,527
- Generation X (41-56): $259,100
- Baby Boomers (57-75): $198,203
- Silent Generation (76+): $163,254
Based on recent real estate trends, millennials are breaking into the market. In an attempt to take advantage of low interest rates and working from home, many are buying out in the suburbs.
Other Debt By Age
Mortgage debt isn’t the only type of debt out there. Credit card debt also makes up a portion of consumer debt, affecting consumers of every age. However, some generations hold greater outstanding balances compared to others. Here is the average credit card debt divided by generation:
- Generation Z (16-24): $2,312
- Millennials (25-40): $4,569
- Generation X (41-56): $7,236
- Baby Boomers (57-75): $6,230
- Silent Generation (76+): $3,821
The average credit card debt is down for all generations compared to years before the COVID-19 pandemic. In 2021, the average credit card issued through banks totaled $5,525. That is almost $1,000 lower than the average in 2019 at $6,494.
There is also the average non-mortgage debt, which includes debt such as school and auto loans. Here’s how this category looks:
- Generation Z (16-24): $12,524
- Millennials (25-40): $28,317
- Generation X (41-56): $32,898
- Baby Boomers (57-75): $24,136
- Silent Generation (76+): $11,725
While every generation varies in the amount of debt it carries, there is a pattern. Gen Xers have the highest amount of debt in all three categories, on average. This is likely because they have the most types of debt to pay for, from children’s school loans to car loans to mortgage payments. And often the largest single debt is a mortgage.
Should I Pay Off My Mortgage Early?
Paying off your mortgage early can be beneficial in some circumstances. It frees you up from debt and allows you to focus on other financial needs. However, it might not be the right move for every homeowner. Consider these pros and cons before making a decision on how you’ll handle your future mortgage payments..
Pros of Paying Off Your Mortgage Early
One of the biggest advantages of paying your mortgage early is the reduced interest. Every month you make a payment, some of it goes to interest. The fewer payments you have to make, however, the less you must pay in interest. Although, you should talk to your lender beforehand. Make sure your additional payments go directly to your principal – not interest.
There is also security when you own your home outright. For example, let’s say you haven’t paid off your loan yet. But you’re struggling to keep up with the monthly payments. If you fall behind a significant amount and default, your house may go into foreclosure. But if you have no debt on the home, you don’t have to fear losing it just because you hit a financial rough patch.
More than anything, paying off your mortgage early takes a weight off your shoulders. You no longer have to worry about it. And, you have increased cash flow, helping you achieve financial freedom. That allows you to put money elsewhere, such as other debts or in a savings plan.
Cons of Paying Off Your Mortgage Early
While there is the possibility that paying your mortgage early saves you money in the long run, it may not be the right financial move for you. Some experts believe that Americans should concentrate their efforts in other places.
For instance, using your extra funds to invest instead can be lucrative. The interest you may earn through a stock market portfolio could outpace the interest rate on your mortgage. So, if you dedicate several years to investing, you could come out more financially secure.
Paying off a mortgage early can also result in prepayment penalties. This is essentially a fee you incur if you refinance, sell, or completely pay your mortgage within a timeframe from closing on it. Typically, the period lasts between three to five years. Because of this, it’s important to check with your lender and their rules beforehand.
In addition, your mortgage may play a crucial part in your taxes and credit score. Homeowners can claim the amount they pay in interest on their mortgage to lower their taxable income. You lose this advantage when you pay off your mortgage early. On top of that, you may face a small drop in your credit score. With a mortgage gone, your score may decrease.
How to Pay Off Your Mortgage Early
One option you have to pay off your mortgage early is to make extra payments. You would apply the additional funds to the mortgage’s principal balance. This reduces the total amount of money you have to pay interest on before it has the chance to build. As a result, you can potentially take years off your mortgage term, saving you thousands.
You don’t necessarily have to make extra payments year-round, though. You can commit to just one or two to help you along. A good time to try this may be when you receive your tax refund. According to the independent National Taxpayer Advocate (NTA), the average refund amount in 2021 was $2,827. Based on the most recent American Housing Survey data from the U.S. Census Bureau, the median monthly mortgage payment is $1,609. So, there is a chance you will receive enough from your tax refund to cover an additional mortgage payment.
You can also switch your payment schedule up. Paying on a biweekly basis increases the frequency of your payments. Suppose you pay $1,000 per month for your mortgage. Instead, on a biweekly schedule, you would pay $500 every two weeks. That helps you get in an extra payment (13 versus the usual 12), reducing your debt quicker, without draining you of cash.
But if your situation changes, you may want to try a different tactic. Someone with an increased income may want to consider refinancing to a shorter loan term. That increases your monthly payments. However, you won’t have to schedule in extra payments yourself or fear penalties.
Paying down your mortgage debt can be beneficial. It opens you up to new financial opportunities and provides you with peace of mind. However, putting additional money into your home loan may not be the right move for every homeowner. There are other options worth considering, too.
For instance, using your extra funds to invest instead, such as in a retirement account. Alternatively, you may want to use any additional cash to pay other, higher-interest debt down first.
Tips for Managing Your Mortgage
- Choosing where to direct your money is a big decision. There a multiple factors to consider, including long-term goals and potential taxes. If you don’t know your next step, consider speaking to a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Your mortgage debt can play a significant role in the way you plan retirement. That’s why one of your most useful tools is a free mortgage calculator.
- Mortgage rates are more volatile than they have been in a long time. Check out SmartAsset’s mortgage rates table to get a better idea of what the market looks like right now.
Photo credit: ©iStock.com/yacobchuk, ©iStock.com/monkeybusinessimages, ©iStock.com/marrio31