How To Pay Off Your Mortgage: Step
While the process of paying off your mortgage typically takes decades, crossing the finish line requires a few extra steps. Lets review the steps it takes to pay off your mortgage:
Is It Worth It To Refinance
If you were already tossing around the idea of refinancing, these low rates couldnt have come at a more perfect time. Getting a mortgage with a 12% drop in interest rate can make a huge difference in your monthly budget and ability to pay off your mortgage faster.
Just remember to do the break-even analysis we mentioned earlier to make sure youll stay in your home long enough for your refinancing savings to cover the cost it takes to do the refi.
Refinancing costs usually dont include property taxes, mortgage insurance and home insurance because they were set up when you first bought your home. Remember, youre revising the original mortgage, not starting completely from scratch.
Refinance closing costs include:
- Refinance application, new home appraisal and title search
- Home inspection fee
- Lenders attorney review fee
- Origination fee
- Points fees
While you may not be able to avoid all of these closing costs, you can avoid paying for mortgage pointsfees you pay to the lender when you close in exchange for a lower interest rate. Just ask for a par quote or zero quote. That means the closing cost estimates will not include points.
When Should I Pay Off My Student Loans First
Alternatively, you might want to make extra repayments on your student loans over your mortgage if any of the following ring true for you:
You have several private student loans all with different rates
Juggling repayments on multiple private student loans all with different interest rates can be difficult to manage. Instead of making extra payments on your mortgage, you might want to focus on getting your student debt paid off. How you approach this is up to you.
One option is to use the debt avalanche method, which has you pay off your student loans in order of highest interest. This will help you save the most in the long run. Alternatively, you could use the debt snowball method, which has you focus on your smallest student loans first ideal if youre best motivated by little wins.
Youre getting pressure from your cosigner
If a parent or family member cosigned your student loans, theyre equally responsible for paying back your debt should you default. This means your student loans have raised their debt-to-income ratio a major factor lenders look at in deciding whether to approve you for a loan or credit card.
If youre getting pressure to pay off your debt so your cosigner can apply for a car loan or mortgage, you might want to prioritize paying off your student loans as fast as possible.
You have a large student debt load and long term
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You Might Want To Pay Off Your Mortgage Early If
- Youre trying to reduce your baseline expenses: If your monthly mortgage payment represents a substantial chunk of your expenses, youll be able to live on a lot less once the payment goes away. This can be particularly helpful if you have a limited income.
- You want to save on interest payments: Depending on a home loans size and term, the interest can cost tens of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses. While its true you may lose the tax deduction on mortgage interest, you may still save a considerable amount on servicing the debt. Youll have to reckon with a decreasing deduction anyway, as more of each monthly payment applies to the principal.
- Your mortgage rate is higher than the rate of risk-free returns: Paying off a debt that charges interest can be like earning a risk-free return equivalent to that interest rate. Compare your mortgage rate to the after-tax rate of return on a low-risk investment with a similar termsuch as a high-quality, tax-free municipal bond issued by your home state. While mortgage rates are currently low, theyre still higher than interest rates on most types of bondsincluding municipal bonds. In this situation, youd be better off paying down the mortgage.
- You prioritize peace of mind: Paying off a mortgage can create one less worry and increase flexibility in retirement.
Looking At The Interest Rates And Tax Benefits Can Help You Decide
Mortgages and student loans are both considered good debt their interest rates are typically low and theyre seen as a form of investment. This is why you might want to focus on paying back your other debts first were looking at you, credit cards. Then once youre left with just a mortgage and student loans, looking at the interest rates and tax benefits can help you decide which to tackle first.
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Mortgage Recasting Vs Refinancing: Which Is Better
Housing costs can put a real strain on a budget. Recent Experian data puts the average mortgage balance at $208,185, with more than 1.3% of mortgage accounts anywhere from 30 to 180 days past due. Homeowners looking to restructure their loan to reduce their monthly payment may do so through a mortgage recast or refinance.
Both mortgage recasting and refinancing can lower your monthly mortgage payment to free up room in your budget and make it easier to avoid missing a payment. We’ll unpack the details in just a moment, but here’s a quick side-by-side comparison:
|Mortgage Recasting vs. Refinancing|
|Administrative fee that’s typically a few hundred dollars||Closing costs that can total 2% to 5% of the loan amount|
|Eligibility||Depends on the mortgage lender, though you cannot recast federally backed mortgages like FHA, USDA and VA loans||Virtually all mortgage types can be refinanced a minimum credit score of 620 is generally required for a conventional mortgage refinance|
|Will your interest rate change?||No||Borrowers may get a lower rate if current market conditions allow for it a credit score that has improved since you were initially approved for the loan can also help you secure a better rate|
|Will your loan term change?||No||You may opt for a shorter or longer loan term|
|Is a home appraisal required?||No||Usually|
Benefits Of Investing In Your Home Loan The Power Of Pay Down
Reducing your interest is always good. Paying off a $160,000 loan with a 4% interest rate in 30 years means interest is approximately $115,000. Paying it off in 15 years brings interest down to around $53,000 â a saving of just over $61,000. These savings could be invested and used to make more money for your retirement â or simply enjoyed.
How Do I Make The Final Payment
Along with the final payoff, the letter will have a good-through date. This means the total amount you need to pay off is only good through that date. Additional interest accrues after that date. If you pass the good-through date without payment, you must request an updated payoff letter.
For Rocket Mortgage clients, its important to note that you cant just sign into your Rocket Account and pay the total balance. A mortgage must be paid off with certified funds, either a wire transfer from your bank or a certified check, written as instructed in your payoff letter.
When you do send the payment, well send you an email confirming we received the funds. If you have automatic payments set up for your mortgage, either through your lender or your bank, cancel them as soon as your loan has been paid off.
Mistakes To Avoid When Paying Off Your Mortgage Early
If you can afford to pay off your mortgage ahead of schedule, youll save some money on your loans interest. In fact, getting rid of your home loan just one or two years early could potentially save you hundreds or even thousands of dollars. But if youre planning to take that approach, youll need to consider if theres a prepayment penalty, among other possible issues. Below are five mistakes that you should avoid when paying your mortgage off early. A financial advisor can help you figure out your mortgage needs and goals.
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Other Ways To Pay Off Debt
There are other ways to pay down debt without using your home as collateral. Start by figuring out how much you earn, how much of your income goes toward essential expenses, and how much is left, which you can put toward your debt each month.
Then, look into the following strategies for paying off debt. The best method comes down to your financial situation or preference.
How To Pay Off Your Mortgage Early
If paying off your mortgage early is right for you, here are some strategies to do it:
- Make biweekly payments. One way to get started with making extra mortgage payments is to set up a biweekly schedule. This amounts to making a full extra monthly payment each year and can reduce the time spent with a mortgage. Starting with biweekly payments can help you get ahead on your mortgage while allowing you to keep working toward other financial goals.
- Make extra mortgage payments each year. Similar to making biweekly payments, you can simply make an extra mortgage payment once a year, or pay an additional amount each month on top of what you already pay. Be sure to coordinate with your lender so that these extra funds are allocated to the principal.
- Refinance to a mortgage with a shorter term. If you stand to get a lower interest rate, refinancing to a 15-year mortgage means youll pay off the loan sooner. Keep in mind that even with a lower rate, you could be paying more each month, since your payments are now spread out over a shorter period of time.
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If You Decide To Pay Your Mortgage Off Before You Retire
Ideally, you would accomplish your goal through regular payments. However, if you need to use a lump sum to pay off your mortgage, try to tap taxable accounts first instead of retirement savings. If you withdraw money from a 401 or an individual retirement account before 59½, youll likely pay ordinary income taxplus a penaltysubstantially offsetting any savings on your mortgage interest, Rob says.
Get A Balance Transfer Credit Card
Best for: People who can pay off their debt in a relatively short period of time
A balance transfer allows you to move multiple debt balances to one credit card. Some come with a 0% introductory APR for an extended period of time, usually 12 to 21 months. If you can pay down the balance within that time frame, then you can save money.
The interest rate usually increases after that introductory period, so if you have a balance remaining, your debt could get expensive.
This option also might not help much if you cant consolidate all of your debt. You might receive different loan terms and issuers might limit the amount you can transfer to the account.
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What Happens After I Pay Off My Mortgage
After your mortgage has been paid off, it must be recorded with the county by sending whats called the Discharge of Mortgage document. Your lender is required to write up the document, but what happens next is up to local regulations.
Some states require the lender to send the document to you, while others require the lender to send it to the county. Regardless, the burden is on the lender to draw up the document, but its on you to make sure its sent to your countys Registry of Deeds.
Contact your lender to find out what your state requires for the Discharge of Mortgage and to get answers to other questions about your loan.
Rate And Term Refinances
It can be easy to fall into debt if youre having trouble making your monthly mortgage payments. A rate-and-term refinance can help you divert more money toward your debt without changing your principal mortgage balance. This can help you better manage your finances and pay down debt.
As the name suggests, a rate-and-term refinance changes your loan term and/or interest rate. Taking a longer term or a lower interest rate will lower the amount you pay each month. In some rare circumstances, you can even refinance your rate or term without a new appraisal.
How Rate-And-Term Refinances Work
For example, lets say that you have a $100,000 loan with a 4% interest rate and a 15-year term. Your monthly mortgage payment in this example is $739.69. Lets say you refinance your loan to a 30-year term. Your monthly payment becomes $477.42. This leaves you with an extra $262 to put toward your debt without adding PMI or more money to your loan balance. Keep in mind that increasing your term will cause you to pay more in interest over time.
A rate-and-term refinance is faster than taking a cash-out refinance. You may be able to take out an FHA Streamline refinance if you have an FHA loan, or a VA Streamline refinance if you have a VA loan. Streamline refinances have less paperwork and looser requirements. Dont qualify for a Streamline? Youll follow largely the same process as a cash-out refinance:
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But Aren’t Retirement Accounts Tax
Retirement accounts such as the 401, Roth IRA, and Traditional IRA accounts are tax exempt while the money is invested, making them a great place to compound your money tax-free. If your investment goal is retirement accumulation, the tax treatment of retirement accounts is a reason to consider investing in the market rather than paying down your mortgage.
We’re going to interrupt our analysis for a moment for a public service announcement. If your employer matches your contributions in a 401 or you’re investing in another retirement plan that you have not maxed out, your choices are easy. Max out the matching plan first. By participating in your matching program, you’ll achieve a 100% return even if you keep your dollars in cash. Youll be beating both the stock market and whatever rate you have on your mortgage.
Now back to our regular analysis. Given that most homeowners will be taking the standard deduction, the scenario where the S& P 500 is in a tax-exempt account is actually our original scenario where neither is tax affected. For the relatively few people getting a tax benefit from mortgages, this is the scenario where the S& P 500 wins more often than paying down your mortgage.
Paying Off A Mortgage Quicker Without Refinancing
Seeing the outstanding principal balance on a monthly mortgage bill can be defeating. If you’re just into a 30-year mortgage or have had one for years, that grand total of principal owed can look like a dim light at the end of a tunnel you’ll never reach.
Getting rid of that monthly payment can free your money for other things such as investments and can be an emotional lift. For couples nearing retirement, paying off a mortgage early allows them to have fewer bills in retirement. Paying down a mortgage is the best way to build equity in a home.
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Above All Talk About Your Options With A Qualified Financial Adviser
Sometimes paying off your mortgage faster is a great way to save on interest and accumulate wealth. But itâs always a good idea to look at your complete wealth building strategy and make sure youâre not missing opportunities to build wealth elsewhere.
Have confidence in your future with help from a financial adviser.
Mistake #: 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.
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