How Does Paying Off Your Mortgage Early Fit Into Your Retirement Plan
The answer to this question will be different for everyone.
If you know you want to stay in this house during retirement, paying it off now so you don’t have to make monthly payments in retirement might be the right move.
But if you’re, say, 10 years away from retirement and haven’t started investing yet, investing will be a better use of the money than paying off the mortgage early.
How To Pay Off A 30
There are a few ways to pay off a mortgage sooner than the 30-year term.
Options to pay off your mortgage faster include:
- Pay extra each month
- Pay off other debts
There are advantages to each approach. The choice comes down to careful study and a decision based on your financial position and ability to repay what will be higher monthly payments.
Get A Loan Modification
If your mortgage payments are unaffordable but you want to get back on track and potentially pay the loan off early, consider a home loan modification. Generally reserved for borrowers experiencing financial hardship, a loan modification entails the lender adjusting the interest rate or loan term to help bring the loan current.
With this option, you could save on interest and pay the loan off faster. There could be consequences for your credit, however, depending on how your lender or servicer reports it to the credit agencies, so be sure to discuss this with your lender upfront.
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Refinance With A Shorter
Refinancing a mortgage refers to getting a new loan to replace your current mortgage. The new loan can help cut monthly costs or pay off the loan quicker with a new loan term. A shorter term on the mortgage means it goes away sooner but at the cost of a much higher monthly payment and perhaps some out-of-pocket closing costs. Ask yourself: Can you afford the higher monthly payment of a 15-year loan? Or, are you better off contributing extra each month to a 30-year payment?
Allocate Extra Funds Towards Your Mortgage
Many taxpayers get a tax refund every year. If you use most, or all, of that money as an extra payment on your mortgage, you can make serious progress in getting your house paid off.
Other potential windfalls include a bonus from work, a successful garage sale, or a gift from a relative. And if you get a raise, consider putting all the extra income into your mortgage.
For example, lets say your monthly take-home pay was $4,000 and your 3% raise means that youre now getting $4,120 per month.
Put the extra $120 into your mortgage every month and you wont even miss the money, since youre not used to having it, and youll end up paying off down your mortgage faster than you think.
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When Making Minimum Monthly Payments Works
It may not be a good idea to focus on paying off your mortgage early if you have other debt to worry about. Credit card debt, student loan debt and other types of loans often have higher interest rates than most mortgages. This means that they accrue interest faster.
Youll save more money by paying these debts down than you would if you put all your money toward your mortgage. Its best to sit down with your financial paperwork and compare interest rates of your other debts to your mortgage interest rate. If your other debts have a higher interest rate, you should pay them down first.
You also may want to avoid paying your loan off early if it carries a prepayment penalty. This is a fee your lender charges if you pay off your mortgage prematurely. Prepayment penalties are usually equal to a certain percentage you would have paid in interest.
This means that if you pay off your principal very early, you might end up paying the interest you would have paid anyway. Prepayment penalties usually expire a few years into the loan.
Consult your mortgage lender and ask about any prepayment penalties on your loan before you make a large extra payment. Prepayment penalties are also noted in your mortgage contract.
How Much Can I Save By Paying Off My Mortgage Early
How much you can save depends on your method of overpayment, the amount you overpay and the terms of your mortgage.
For example:
If you had a remaining mortgage debt of £150,000 to be paid over 25 years at an interest rate of 5% and you decided you wanted to overpay by an extra £100 each month, you could save a total of £23,200 in interest alone. It would also mean you would have paid off the entire mortgage in just over 20 years instead of 25.
Paying a lump sum of £10,000 up front instead could still save you £22,185 in interest alone, and mean you finish paying off your mortgage in 22 years instead of 25. But if you pay a lump sum, make sure it does not go over the penalty limit for overpaying.
For example, if you still had a mortgage of £150,000 remaining, and wanted to pay £20,000 in one go, but the bank had a repayment penalty on any payments over 10% , you would be required to pay a fee on the extra £5,000.
Check what this fee might be, and calculate whether it is still worth it. If you time it correctly and do your calculations in advance, you can continue to overpay without incurring any early repayment penalties.
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Should I Pay Off My Mortgage
Just because you can pay off your mortgage early doesnât necessarily mean that you should. Of course, it would feel great to rid yourself of a huge financial burden like a mortgage. But if you really want to know if itâs a good decision, you have to look at the math.
There are pros and cons to paying off your mortgage early. Whether the pros outweigh the cons will depend on your overall financial situation.
Dont Let Prepayment Penalties Drag You Down
Nobody wants to pay extra fees on their mortgage, but fortunately, those fees are pretty easy to avoid. Nowadays, lenders must legally offer loans that dont include prepayment penalties, although you may pay a higher interest rate in the process. Better yet, you can switch to a lender that doesnt charge them at all!
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Do You Have Any Other More Expensive Debts
Expensive debts are those that cost a lot to pay off over time.
Other expensive debts could include unsecured loans, where the interest rate is much higher than the cost of your mortgage borrowing.
Always pay off more expensive debts before thinking about reducing your mortgage but be careful not to rack them up again.
Why You Shouldnt Pay Off Your House Early
You have debt with a higher interest rate Consider other debts you have, especially credit card debt, that may have a really high interest rate. This amount is substantially higher than the average mortgage rate. Before putting extra cash towards your mortgage to pay it off early, clear your high-interest debt.
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What Are The Pros And Cons Of Paying Off A Mortgage Early
Wright: Paying off your mortgage early reduces your debt burden and potentially saves you thousands in interest. However, depending on how aggressive your payoff timeline is, you may find that it results in you being unable to reach other financial goals or missing out on opportunities to grow your money through investments. With a paid-off mortgage, youd also miss out on being able to take advantage of the tax deductions for mortgage interest payments.
Boomer: One clear advantage is that it eliminates a monthly mortgage payment, allowing homeowners to tackle other debts or invest in other ventures. Additionally, an early payoff will reduce the amount of interest that a homeowner will pay over time. A potential disadvantage of paying off a mortgage early is that it may come with a prepayment penalty, so it is important to understand the details included in your loan documents.
Change Your Payment Schedule From Monthly To Biweekly
Making biweekly, instead of monthly, payments is a way to pay down your mortgage faster without having to make a big payment. Its simple math: A monthly payment schedule is 12 months of payments per year. A year has 52 weeks, so a bi-weekly schedule would be 26 payments per year. Thats one extra payment a year.
Lets assume you have a $200,000 mortgage with a 30-year term and a 4% interest rate. Your monthly payment would be about $955, resulting in $11,460 paid toward your mortgage over the course of a year. A bi-weekly payment of $477.50 may seem like the same thing , but multiplied by 26, thats $12,415 toward your mortgage . That extra payment goes purely toward the principal meaning youll pay off the loan four years faster and save $22,366 in interest.
Many lenders will allow you to make the switch, but some dont offer the option and some charge fees, which isnt worth it, says Ilyce Glink, CEO of Best Money Moves and author of 100 Questions Every First-Time Home Buyer Should Ask. Every month, you can do the same thing by taking the cost of one or two extra payments, divide by 12, and add that amount to your monthly mortgage payments, Glink says.
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Make Extra House Payments
Lets say you have a $220,000, 30-year mortgage with a 4% interest rate. Our mortgage payoff calculator can show you how making an extra house payment every quarter will get your mortgage paid off 11 years early and save you more than $65,000 in interestcha-ching!
But before you start making extra payments, lets go over some ground rules:
- Check with your mortgage company first. Some companies only accept extra payments at specific times or may charge prepayment penalties.
- Include a note on your extra payment that you want it applied to the principal balancenot to the following months payment.
- Dont shell out your hard-earned cash for a fancy-schmancy mortgage accelerator program. You can accomplish the same goal all by yourself.
What The Early Mortgage Payoff Calculator Does
Do you want to pay off your mortgage early? Maybe you have 27 years remaining on your home loan but you would rather pay it off in 18 years instead. The early payoff calculator demonstrates how to reach your goal.
The mortgage payoff calculator shows you:
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How much more principal you would have to pay every month so you can pay off the loan in a certain number of years.
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How much interest you would save by paying off the loan early.
There are many reasons you might want to accelerate the mortgage’s payoff, but the motivation usually boils down to either or both of these:
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You want to own your home free and clear by a milestone in life, such as your retirement or the beginning or end of your kids’ college years.
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You want to reduce the total interest you pay over the life of the loan.
To steadily pay off the mortgage early, you need to know how much more to pay toward the principal balance every month to accomplish that goal. This calculator lets you do that.
When paying down the principal on a mortgage faster, keep in mind that each servicer has its own procedures for assuring that your extra payments go toward the principal balance instead of toward future payments. Contact your servicer for instructions.
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Can You Pay Off A Mortgage Early
Because mortgages tend to be large loans that last for a couple of decades or longer, paying off the loan early can save you tens of thousands of dollars in interest. Not to mention, it feels good not having a monthly mortgage payment to worry about.
When you send in your monthly check to your mortgage lender, the payment is split between principal and interest. Early on in the loan, a large portion of that payment is applied to interest. As time goes on, more of the payment goes toward paying down the principal. This is known as amortization, and it allows the lender to make back a larger portion of their money within the first several years of repayment.
The key to paying off your mortgage early is by applying extra payments to the principal.
B How Fast Can I Pay Off My Mortgage
You can pay off your mortgage as fast as you want if your bank allows it.
Some people decide to pay off their mortgage in just a few years, whereas others may keep their mortgage for the full 30 years.
You may want to think about the pros and cons of paying off your mortgage to see what timeframe is best for you.
You can learn how to pay off your mortgage in 5 years, 10 years, 20 years and so on with the tips Im about to share with you.
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Should You Pay Off Your Mortgage Before Retirement
Do you really need to pay off your mortgage before retiring? Most individuals will jump through … hoops to live mortgage-free, regardless of whether it makes the most sense financially.
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Is retiring with a mortgage a good idea? Most individuals will jump through hoops to live mortgage-free, regardless of whether it makes the most sense financially. Sure, all else equal, it’s always better to reduce your expenses. But in most cases, all isn’t equal: paying off a mortgage early or forgoing one entirely typically comes at the expense of something else. Retiring with a mortgage doesnt typically pose a financial risk, and at times its the best financial decision. But paying off a mortgage before retirement has upsides also. Heres when it may and may not make sense to pay off a mortgage before retiring.
Should you pay off your mortgage before retiring?
Kristin McKenna, Darrow Wealth Management
Increase Your Regular Payments
If you can justify it in your budget, consider increasing your monthly mortgage payments by an affordable amount. The key here is to ensure your extra contributions go towards your principal, not your interest or next month’s billso check your loan terms and chat with your mortgage servicer to be certain.
A regular payment increase that adds up to even just one additional full mortgage payment per year can save you thousands of dollars in interest over the life of a 30-year mortgage, and higher payments can save you even more. You can make extra payments manually when your budget allows, or add an ongoing principal-only amount to your regular payment. Many lenders allow you to adjust your payment to include the extra amount, whether you’re paying by check or checking account debit.
You can also start making your payments biweekly if your lender allows it if they don’t, try to put aside the cash to do it yourself. This way, you pay half your monthly mortgage bill every other weeksince it adds up to an extra payment per year, this will also save you interest money over time.
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Do You Have Other Debts To Pay Off
The general rule of thumb is that you should focus on paying off higher-interest debt before lower-interest debt. You may be paying a higher rate on a credit card or private student loan than on your mortgage, so you’d benefit more by paying those off early.
Don’t pay so much toward your higher-interest debt that you risk defaulting on mortgage payments, though. Yes, , and the issuer may take legal action if you default on card payments. But defaulting on mortgage payments can be an even bigger risk, because you could lose your home.
There’s no clear right or wrong answer about whether or not you should pay off your mortgage early. It depends on your situation and your personal goals.
Make Mortgage Payments More Frequently
Instead of making one monthly payment toward your mortgage loan, you can make a half-sized payment every two weeks resulting in extra payments during the year.
In other words, if your usual mortgage payment is $1000 a month, you would instead pay $500 every other week.
These extra payments will have nearly the same impact on your budget as paying one monthly payment, but because there are 52 weeks in a year, a biweekly payment schedule will result in 13 full-sized payments a year instead of the normal 12.
Youll be making an entire extra payment every year without having to scrounge around for the extra money.
To look at some real-life numbers, if you have a 30-year $200,000 mortgage at an interest rate of 5%, making biweekly instead of monthly payments would save you $34,328 in interest.
Save you from extra mortgage payments, and allow you to pay off the mortgage balance almost five years early.
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What Do You Pay Once Your House Is Paid Off
Assuming you are referring to a mortgage: Once your house is paid off, you will no longer have a monthly mortgage payment. However, you will still be responsible for property taxes, insurance, and maintenance.
Make certain that your mortgage statement is in your possession as well. The interest rate, the number of monthly payments you will have to make, and the total amount you will owe at the end of the loan will all be shown here. Finally, you should contact the appropriate state or county office for a lien release. Your claim against the property will be officially dismissed, allowing you to use the property as you see fit.
