Are You Nearing The End Of Your Mortgage Payments
Its often more beneficial for newer owners to be aggressive with their mortgage payments. This is because your money is typically going towards the interest on the loan, not the principal itself. This means that any extra payments will reduce the total amount of interest owed over the course of the entire loan. However, if youre well into a 30-year mortgage, you are likely now paying more of the principal and less interest, which can open up some room to focus on investing.
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.
What Happens If You Pay Off Your Mortgage Early
As long as your loan terms don’t include a prepayment penalty, when you make your final payment on the mortgage you’re free from your largest monthly expense. Keep in mind that you’ll still need to pay for homeowners insurance and property taxes. You probably paid these through escrow before, but now you’ll pay them directly to your insurer and local tax agency.
Pay More Than The Minimum
Imagine you purchase a $360,000 property with $60,000 as a down payment, and the interest rate on your 30-year home loan is 3%. A quick look at a mortgage calculator shows the principal and interest payment on your loan works out to $1,264.81 each month.
You could just make that $1,264.81 monthly minimum payment and cover the interest charges and part of your principal balance. However, paying more than the minimum on your mortgage would result in every extra dollar going directly toward your principal.
If you started this mortgage paying an extra $100 per month from day one, you would save $19,437 in interest payments and knock more than three years off your repayment timeline. Or, if you paid an extra $200 a month, you would save $34,428 in interest payments and pay off your home loan in 24 years instead of 30.
And the news gets better and better if youre able to increase your monthly payment more over time, because again, every dollar over the monthly minimum goes entirely toward paying down your mortgage.
Should I Pay Off My Rental Property Mortgage
Summary: In this article, we will discuss the question: Should I pay off my rental property mortgage or not? Topics include, benefits and disadvantages of paying off a rental property mortgage, how your net worth may be impacted by paying off an investment property early, and how to avoid early mortgage payment penalties.
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Make Biweekly Mortgage Payments
While you can choose to pay any amount over your minimum mortgage payment each month, you can also opt for biweekly mortgage payments instead of paying monthly. With biweekly payments, youll wind up making 26 half-payments toward your mortgage over the course of a year, versus the 12 full payments you would normally make which is the equivalent of only 24 half-payments.
Since a calendar year is technically made up of 52 weeks and not 48 weeks, you end up making two extra half-payments each year using this strategy. Thats equivalent to one full extra mortgage payment each year, which can help you reduce interest payments and own your home faster.
Based on this example, an extra mortgage payment would ultimately save you $21,418 in mortgage interest and shave three years and six months off your mortgage repayment timeline.
Just make sure you do not pay a fee to your mortgage company in order to make biweekly payments. If your mortgage servicer doesnt offer this option, you can roughly accomplish the same goal by mailing in one extra mortgage payment each year, or by taking the principal and interest of your mortgage payment, dividing it by 12, and adding that amount to your monthly payment.
So, in the example above, you would divide $1,264 by 12, which equals $105, and add that amount as an overage toward your principal balance each month. Its not exactly the same result as making biweekly payments, but its very similar.
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.
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Ways To Pay Off Your Mortgage Early
How Mortgage Loans Work
A mortgage is a loan in which a bank or financial institution provides the borrower with the money to purchase real estate, with the property itself being used as collateral. Theyre typically long-term loans 30-year and 15-year mortgages are the most common.
As for the interest rate on the loan, it can either be fixed, in which it doesnt change throughout the term of the loan, or adjustable, changing after a certain period and fluctuating with the market. Rates for mortgage are generally lower than many other types of consumer debt, particularly credit cards.
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Mistake #: 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.
Final Word: How To Make The Right Decision
In an ideal world, everyone would have enough money to invest and pay off the mortgage, rather than decide whether to pay down the mortgage or invest. Most of us, however, have to pick and choose where to put our hard-earned dollars.
By deciding to invest when youre still young, you give your portfolio a longer period of time to withstand market fluctuations, compound and grow, which will maximize your returns. For many, prioritizing RRSP investments can be the best option, especially since the resulting tax refund can go toward paying off the mortgage sooner offering the best of both worlds.
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What Does It Mean To Pay Off Your Mortgage Early
Many homeowners would love to fast forward to when they own their houses outright and no longer have to worry about monthly mortgage payments. As a result, the idea of paying off their mortgage early could be worth exploring for some people. This will allow you to lessen the amount of interest youll pay over the term of your loan, all while giving you the ability to become the homes full owner earlier than expected.
There are a few different methods by which you can go about paying early. The simplest method is just to make extra payments outside of your normal monthly payments. Provided this route doesnt result in extra fees from your lender, you can send 13 checks each year instead of 12 . You can also increase your monthly payment. By paying more each month, youll pay off the entirety of the loan earlier than the scheduled time.
If youre considering paying off your mortgage ahead of time, make sure you avoid these five critical mistakes.
Study Finds Most Should Pay Off Their Mortgage
The Center for Retirement Research at Boston College conducted a study of retirees, incomes, and mortgages. It concluded that in retired households, paying off a mortgage is better for all but a few people.
The small percentage of people for whom the study found that not paying off a home loan was best were willing to invest an amount in stocks equal to or more than the amount they borrowed for their mortgage. This study looked at both risk and taxes and found that for most retired people, paying off their mortgage is the best option if they have the means to do so.
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Your Money Could Earn A Higher Return
One main argument that you should pay off your mortgage early is to minimize how much interest you pay. If you take longer to pay your mortgage, youll pay more interest to the lender.
But what if your investments earn a higher return than your interest rate? Not only could you cover interest with your investments but you could be turning a profit too.
Investing Vs Paying Off Your Mortgage
Owning your home outright is often a key financial goal for many Australians.
There are certainly many benefits to paying down your mortgage as quickly as you can.
But the big question is should you be solely focused on paying your mortgage off early to save on interest costs or are there other ways to optimise the spare dollars you have?
It’s All About The Interest Rate
If your mortgage carries a high interest rate and you have the cash on hand to pay it off, then you might as well go for it. But if you have a low interest rate, you can take advantage of it by hanging onto that mortgage and using your cash to generate higher returns elsewhere.
Let’s say you get a $100,000 mortgage with a 4% interest rate. If you slowly pay it off over 30 years, you’ll end up paying $72,000 in interest. That’s a lot of money, so it’s natural to think that any extra cash should go toward paying down your principal.
However, let’s say you stick to your 30-year payment schedule, invest $240 each month — just half your mortgage payment — and earn a reasonable 8% return. In that case, your portfolio will grow to $352,000 by the time you’ve paid off your mortgage. So if you have a relatively low interest rate, then clearly it can pay to hold on to that mortgage, continue reaping the tax benefits, and invest spare cash.
Remember, too, that when you get a 30-year mortgage, you’re locked into a fixed interest rate for that period of time. If you have a low rate, you’ll get to keep it as long as you carry that mortgage, inflation be damned. So why not let your lender absorb all that inflation risk while you enjoy the benefits of an affordable monthly payment?
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Switch To A Biweekly Payment Schedule
One easy way to pay off your mortgage sooner is to pay your loan on a biweekly basis instead of monthly. For example, if your monthly mortgage payment is $1,000, youd pay $500 every 2 weeks instead of $1,000 at the end of the month.
Because there are 52 weeks in a year, following this schedule allows you to make 13 payments on your loan instead of the standard 12. This reduces your debt faster without making you feel strapped for cash.
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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.
About The Author
Paying Off The Mortgage Early
Some homeowners choose to pay off their mortgage early, and the benefits can vary, depending on a person’s financial circumstances.
For example, retirees may want to reduce or eliminate their debt since they’re no longer earning employment income. In other cases, people may want to free up their monthly cash outflows by paying off their mortgage.
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Mistake #: Not Putting Extra Payments Towards The Loan Principal
Throwing in an extra $500 or $1,000 every month wont necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money youre paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
If youre writing separate checks for extra principal payments, you can make a note of that on the memo line. If you pay your mortgage bill online, you might want to find out whether the lender will let you include a note specifying how additional payments should be used.
A Mortgage Kept Me Hungry
I’ve talked to several people, including readers of my personal finance blog, Financial Samurai, who had similar experiences after paying off large amounts of debt early.
“I’ve definitely noticed that the closer I get to financial freedom, the less motivation I have to go above and beyond at my job,” one person told me. “It’s almost as if we need that monkey on our backs to keep us moving forward.”
And then there are some who feel the opposite.
A reader on Financial Samurai commented: “I just paid off my house after eight years and four months. Now I’m extremely motivated to put as much as possible into other investments, such as the stock market, my own business and rental property. I’m 35 and self-employed, so I don’t have a pension or company 401 to rely on.”
Of course, everyone is different. For me, a mortgage fueled my hunger. Without it, our monthly cash flow increased by $2,500 per month, and we saw it as extra spending money.
The most important lesson I learned from paying off my mortgage early is that you should always have something that keeps you motivated and financially driven. When you’ve got your living costs covered and things are easy, it’s tempting to get soft and ignore your finances.
Only the most “gung-ho” people will bother to take risks or put in the extra hours to get that raise. If you have no financial burden and no one is depending on you to provide, it doesn’t make sense to work twice as hard.
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Should You Pay Off A Mortgage Before You Retire
If youre like most people, paying off your mortgage and entering retirement debt-free sounds pretty appealing. Its a significant accomplishment and means the end of a major monthly expense. However, for some homeowners, their financial situation and goals might call for keeping a mortgage while attending to other priorities.
Lets look at the reasons why you mightor might notdecide to pay off a mortgage before you retire.