Not Asking If Theres A Prepayment Penalty
Mortgage lenders are in business to make money and one of the ways they do that is by charging you interest on your loan. When you prepay your mortgage, youre essentially costing the lender money. Thats why some lenders try to make up for lost profits by charging a prepayment penalty.
Prepayment penalties can be equal to a percentage of a mortgage loan amount or the equivalent of a certain number of monthly interest payments. If youre paying off your home loan well in advance, those fees can add up quickly. For example, a 3% prepayment penalty on a $250,000 mortgage would cost you $7,500.
In the process of trying to save money by paying off your mortgage early, you could actually lose money if you have to pay a hefty penalty.
What Are Some Reasons A Homeowner Might Want To Pay Down Their Mortgage More Quickly
Wright: Knowing you own your home outright is a major incentive for paying your home off early. Some homeowners may look toward early payoff to save on interest, free up cash or reduce their overall debt burden before retiring or reaching other milestones in life. Paying down your mortgage early also allows you to wave goodbye to private mortgage insurance fees as they can be removed once you reach 20 percent equity in the home. With PMI fees ranging from 0.5 percent to 2 percent of your loan balance, freeing up this money allows you to use it elsewhere such as for upgrades to increase the value of the home or to take advantage of wealth building opportunities.
Boomer: Another big advantage of paying down a mortgage more quickly is building up equity in the property. A very effective strategy for achieving this is to make one additional monthly payment per year. Homeowners can pay off a typical 30-year mortgage eight years earlier by doing so.
Tips For Accelerating Your Mortgage Repayment
In addition to the strategies above, here are four tips to help you accelerate your mortgage repayment:
- Make a budget: The first step to accelerating your mortgage repayment is to create a budget. Having a budget will help you determine how much you can afford to put toward your mortgage each month. It will also help you identify areas where you can cut back on spending in order to make more room in your budget for your mortgage payments.
- Prioritize savings: Once you have a budget in place, prioritize your savings. Setting aside a portion of your income each month for savings will help you build an emergency fund and give you the flexibility to make extra payments toward your mortgage when needed.
- Look into refinancing: Refinancing your mortgage can help you lower your interest rate, reduce your monthly payments, and shorten the length of your loan. Be sure to do your research and understand all the potential risks before refinancing.
- Invest in home improvements: Investing in home improvements can increase the value of your home and help you build equity faster. Making upgrades to your home can also help you qualify for a lower interest rate when refinancing.
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When Paying Off Your Mortgage May Make Sense
There may be good reasons to pay off your mortgage. It can save you thousands of dollars in interest, depending on the current size of your debt, and give you peace of mind that no matter what happens in the future, you own your home outright. Paying off your mortgage may make sense if:
- You have substantial retirement savings, especially if the funds you’d be withdrawing are in a taxable account and are not earning much interest.
- You’re downsizing. If you’re planning to sell your home for a smaller one, you can apply the equity to your new home, resulting in a modest mortgage or perhaps no mortgage.
Your mortgage is a factor in your retirement income plan and can affect your quality of life.
The Bottom Line: Paying Off A Mortgage Early Has Benefits But Isnt For Everyone
Its never too early to think about how to reinvest what youre saving in monthly mortgage payments if youve paid your mortgage off ahead of schedule. After celebrating a financial milestone, its a good idea to start working toward others. You might decide to pay off other debt, increase your retirement savings or use the savings to make home renovations to increase property value with some sweat equity.
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Extending Your Loan Term When Refinancing
Refinancing can save you money in multiple ways, as it allows you to convert to either a shorter or longer loan term, depending on whats best for you. So if youre 10 years into a 30-year mortgage term, you could potentially refinance to a 10-year term and shave off 10 years. On the flip side, you could go for another 30-year term to lower your monthly payments.
However, loans with shorter terms tend to have lower interest rates, allowing you to both save on interest and reach full ownership much sooner. In some cases, though, refinancing could cost you more in the long run, especially if youre planning to extend your loan term. Before you refinance, its a good idea to crunch some numbers and figure out whether having a longer mortgage term really makes sense.
Dont forget closing costs either. If your lender agrees to let you roll those costs into your loan, you could end up paying more money. After all, youll now be on the hook for interest on a larger loan amount.
What Does A Payoff Statement Include
The payoff letter lists the final payment amount, including interest and fees like the county recording fee and statement fee. The fee amounts depend on state and local laws and regulations, along with how many times a payoff quote was requested. Your lender might also enforce a prepayment penalty, which will be listed with other lender fees.
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Should You Pay Off Your Mortgage The Answer May Surprise You
Your financial priorities are different than your neighbors or your best friends or your parents.
Take a home mortgage, for example. Plenty of people are happy with paying 15 or 30 years on a mortgage, while others are anxious to get rid of any debtincluding their home loanas soon as possible.
Which is right? As with most things related to money, its complicatedand more personalthan a single choice.
Heres what to consider if youre thinking about when to pay off your mortgage.
Shorten The Length Of Your Loan
Refinancing your debt to a shorter term may help you pay it off faster and save on the total cost of borrowing. You may be able to qualify for a lower rate, or a shorter or longer loan term, depending on your situation. Remember, shortening the term of your loan could increase your monthly payments.
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Good Debt Vs Bad Debt
Some people think of all debt as bad, but thats not really the case. Experts refer to both good debt and bad debt. A mortgage lands squarely in the good debt column.
How a loan is secured determines whether its good or bad, says Stanley Poorman, a financial professional with Principal®. A mortgage is secured by an assetyour housewhich gives it an advantage. Personal loans and credit cards are not.
Think of good debt this way: Every payment you make increases your ownership in that asset, in this case your home, a little bit more. But bad debt like credit card payments? That debt is for things youve already paid for and are probably using. Youre not going to own any more of a pair of jeans, for example.
Theres another key difference between purchasing a home and buying most goods and services. Very often, people can pay cash for things like clothes or electronics. The vast majority of people couldnt pay cash for a home, Poorman says. That makes a mortgage all but necessary to buy a house.
Reasons To Prioritize Investing First
Some homeowners would rather put every spare penny into an investment rather than paying down their mortgage debt. Their rationale is that the return on the invested dollar is greater than the guaranteed return youd get for paying off your mortgage.
Take for instance a homeowner with $50,000, deciding whether to invest or pay their mortgage. They could make a lump sum payment towards their current mortgage. The additional $50,000 would reduce the principal borrowed and this reduces the overall interest paid. If the mortgage was $450,000, the homeowner locked in their mortgage rate at 2.85%, and if they made no other accelerated or lump sum payments, this additional $50,000 would reduce the overall amount of interest theyd pay on their mortgage by $44,880. . This is like getting a guaranteed return of 2.8% on your invested money. Compare this to high-interest savings accounts that pay between 1.5% and 2% or GICs that pay 1.95% or 2.25%, and this return looks good.
But if youve been a disciplined saver or if you have a pension you can count on in retirement, it may be possible to take the $50,000 and invest it in riskier investments for a possible better return.
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Strategies To Repay Your Mortgage Faster
There are several strategies you can use to pay off your mortgage faster:
- Making bi-weekly payments: Making bi-weekly payments instead of monthly payments can help you reduce the amount of interest you pay over the life of the loan and reduce the number of years it takes to pay off the loan.
- Increasing your payment amount: Increasing the amount of your monthly payments can accelerate the payoff date of your loan and reduce the amount of interest you pay.
- Paying off the principal balance: Making additional payments toward the principal balance of your loan can help you pay off your loan faster and reduce the amount of interest you pay.
- Making extra payments: Making extra payments throughout the year can help you reduce the amount of interest you pay and shorten the term of your loan.
What If I Make Two Extra Mortgage Payments A Year
If making an additional payment on top of what youd already be paying extra through a biweekly schedule or committing to one annual extra payment is a feasible financial option for you, doing so can be a great way to gain full ownership of your home even faster.
However, you should only consider this option if it wont put your ability to pay for your other financial responsibilities at risk.
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What Is A Mortgage Discharge
A mortgage is a loan secured by property, such as a home. When you take out a mortgage, the lender registers an interest in, or a charge on, your property. This means the lender has a legal right to take your property. They can take your property if you dont respect the terms and conditions of your mortgage contract. This includes paying on time and maintaining your home.
When you pay off your mortgage and meet the terms and conditions of your mortgage contract, the lender doesnt automatically give up the rights to your property. There are steps you need to take. This process is called discharging a mortgage.
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Adding Extra Each Month
Simply paying a little more towards the principal each month will allow the borrower to pay off the mortgage early. Just paying an additional $100 per month towards the principal of the mortgage reduces the number of months of the payments. A 30 year mortgage can be reduced to about 24 years this represents a savings of 6 years! There are several ways to find that extra $100 per month taking on a part time job, cutting back on eating out, giving up that extra cup of coffee each day, or perhaps some other unique plan. Consider the possibilities it may be surprising how easily this can be accomplished.
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Refinance To A Shorter Term Length
Itâs common for mortgage borrowers to opt for a longer repayment term in order to keep monthly payments lowâtypically 30 years. However, as time goes on, your income may increase or your lifestyle may change to free up more cash flow.
If thatâs the case, you may be able to refinance your loan to a shorter term. Since the repayment period gets crunched into a shorter time period, the monthly payments will likely increase. However, this is an effective way to pay off your mortgage much earlier and save a ton of money on interest, especially if you also qualify for a lower interest rate.
Take a look at this comparison of a $250,000 loan with a 30-year, fixed-rate term versus a 15-year, fixed-rate term:
| 30-year fixed rate |
|---|
Is It Wise To Pay Off My Mortgage With My 401
You might have a pile of cash sitting in your 401, but its never a good idea to use your retirement money to pay off your house. First off, youre going to need that money if you ever plan to retire. And second, youll be hit by taxes and a 10% early withdrawal penalty. So youll lose 30% or more of your money before you can even put it toward your mortgage.
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Ramsey Solutions
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.
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Things You Should Do Instead Of Paying Off Your Mortgage
In most cases, paying off debts early is a smart financial idea, as youll save money on interest owed. But when it comes to a mortgage, this isnt always the case in some cases, you may be penalized and end up paying more if you pay this debt off before the full mortgage term. Plus, there are other reasons why it may not make financial sense for you to pay off a mortgage early. Heres why it might not pay to pay off your mortgage early.
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How To Stay Motivated
Five years can feel like a slog. It would be easy to get discouraged or just weary of the sacrifices. So think about how to maintain your motivation. Create a mortgage payoff tracker that also includes milestones. Celeberate progress. Visualize how youll spend or invest the extra money youll have once five years is up.
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What Happens When You Pay Off Your Mortgage
As soon as you take out a mortgage, you probably can’t wait until the day when you pay it off. But when that day finally comes, what do you do?
Don’t kick your feet up just yet. Once you pay off your mortgage, there are a few steps you have to take to complete the process of establishing that you now fully own the home outright. While the rules can vary a bit based on your state and lender, the process is similar.
Saving Money By Getting Below Pmi Requirements
Mortgage companies require PMI when the borrower does not have 20% or more for a down payment. It is protection for the lender in case the borrower defaults on the loan. So, if a home was purchased with less than a 20% down payment, the bank is probably charging PMI. However, once the borrower owns 20% of the home, this charge could be eliminated. Some borrowers take out a second mortgage to bypass the PMI requirement.
Some banks may automatically charge for PMI until you loan-to-value is at 78%, but you can call them when your loan hits 80% to get PMI charges removed.
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When Balancing Early Mortgage Repayment And Other Financial Responsibilities Works
You should have a robust household emergency fund before you think about paying extra cash toward your mortgage. An unexpected auto bill, medical expense or other cost can upset your budget if you dont have any liquid cash.
While its possible to take cash out of your home equity with a refinance, this process takes time, which you may not have in an emergency. Make sure you have plenty of money set aside for emergencies before you put any extra toward your mortgage loan.
You may want to put off paying off your mortgage if you have another big expense coming up. Your priority should be putting money into your 401 or IRA. You might also want to consider diverting your extra money into a childs college fund or into savings for an upcoming vacation or wedding.
Theres no point in paying off your mortgage if it means going back into debt in the future.
Start Planning Your Early Mortgage Pay Off
The next step is planning how you intend to pay off your mortgage early. Mortgage calculators are an invaluable resource for visualizing a way forward. They can break down a clear path to follow and a realistic timeline. Call a nonprofit for guidance on approaching and planning your mortgage payoff. They offer free financial advice that will give you a clearer picture of where you stand, clarifying financial strengths and limitations. Consider a debt management plan if you need help understanding your debts and organizing your bills.
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