If You Lose Your Job You Could Be Screwed
Lets drive home again the point that your home is not a liquid asset. There are only two ways to get cash out of the home:
We just discussed how borrowing money against your home will virtually defeat the purpose of paying it off early. But there is an additional complication if you lose your job: its unlikely that you will be able to obtain a loan against your home if youre unemployed.
During a period of prolonged unemployment, your only choice may be to sell your house in the event that cash is especially tight.
Once again, a plan to pay off your mortgage early should come with a companion commitment to building up a large emergency fund that will see you through a time of prolonged unemployment.
Save On Your Home From Day One
Planning ahead when you buy a home can also help you minimize the total amount you owe. One way to save big, Orman says, is to choose a cheaper, 15-year fixed rate mortgage over a 30-year one.
In March of 2017, for example, “the average rate for a 30-year fixed rate was 4.3 percent, while a 15-year an average fixed rate of just 3.5 percent,” Orman wrote in a post on her blog. “That’s nearly a percentage point less!”
A 1 percent variance can make a huge difference. On a $250,000 loan, paying 4.3 percent for 30 years amounts to $195,000 in interest, according to Orman, while 15 years at 3.5 percent comes out to only $72,000. That’s more than $100,000 in savings.
On Tuesday, the 30-year fixed rate mortgage was at 4.78 percent, while the 15-year fixed rate mortgage was at 4.08 percent, according to Bankrate, so the difference between the two options has shrunk. But the shorter-term loan can amount to significant savings when the rates are similar as well. On a $250,000 mortgage, you’ll pay $78,000 in interest over the full term of a 15-year plan and $169,000 for a 30-year plan, even if they both offer 3.8 percent interest rates, according to Bankrate’s mortgage calculator.
However, a 15-year mortgage isn’t the right choice for everyone. While the lower interest rate saves you money in the long term, the monthly payments are much higher.
What To Expect When Discharging Your Mortgage
A mortgage discharge is a process involving you, your lender and your provincial or territorial land title registry office.
This process varies depending on your province or territory. In most cases, you work with a lawyer, a notary or a commissioner of oaths. Some provinces and territories allow you to do the work yourself. Keep in mind that even if you do the work yourself, you may have to get documents notarized by a professional such as a lawyer or a notary.
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Common Questions About Ge Washers:
Ready To Refinance Your Mortgage
If you want to refinance to a mortgage you can pay off fast, talk to our friends at Churchill Mortgage. The home loan specialists at Churchill Mortgage show you the true costand savingsof each loan option. They coach you to make the best decision based on your budget and goals.
About the author
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.
Bring Your Lunch Into Work
Sure, bringing an egg salad sandwich to work every day isnt as fun as going to a restaurant with your coworkers. But trading lunch out for eating in can make you a lean, mean, mortgage-free machine.
Suppose packing your lunch frees up $100 to use toward your mortgage every month. Based on our example above of the $220,000 loan, that $100 in lunch money will help you pay off your mortgage four years ahead of schedule and save you nearly $27,000 in interest!
Cant quite spare a whole $100 from your food budget? No worries. Even small sacrifices can go a long way to help pay off your mortgage early. Put Andrew Jackson to work for you by adding just $20 to your mortgage payment each month. Based on our example, youll pay your mortgage off a year early, saving over $6,000 in the process.
When Your Mortgage Is A Tool Rather Than An Obligation You’re In A Good Spot
Regardless of where you end up on the decision to pay off your mortgage early or not, simply being able to do so puts you in a pretty good spot, financially speaking. So recognize that if you’re in a position where that is a possibility, what you’re really doing is optimizing between reasonable options, rather than choosing between a great and an awful idea.
Keep your total financial picture and asset allocation strategy in mind, and you can make a reasonable decision on how to proceed for yourself. No matter when you get around to paying it off, you’re certainly entitled to do a happy dance once your mortgage is gone. And if you can pay it off early in support of one of these five goals, then your happy dance can be all that much brighter.
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Paying Off Your Mortgage Early: Pros And Cons
Mortgage pay off can help save on interest but you may be missing some benefits.
A mortgage will likely be your biggest, lengthiest investment. And if you’re like many homeowners, you have a 30-year mortgage and seemingly never-ending monthly payments.
Whether it’s three decades or a 20-year or 15-year mortgage, this debt doesn’t go away easily and it constantly weighs on you when you plot out your financial goals. This has some borrowers dreaming about how to pay off their mortgage early to eliminate that bill. A mortgage payoff is not an insurmountable task. It can be done with proper planning.
The first thing you should do is explore your home loan options by visiting sites like Credible. Learn more about refinancing with different mortgage lenders and save money long-term.
If you’re already ready to pay off your mortgage early and you don’t need any help doing so, then you should read on to learn about the positives and negatives of this option.
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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.
When Not To Pay Off Your Mortgage Early
Paying off your mortgage as quickly as possible should be an important goal for any homeownerwhether youre halfway through the process, just starting out or even contemplating buying a house. But there are circumstances when making the mortgage debt a priority just doesnt make sense.
For example, if a person is self-employed or runs a home-based business, it may not be as beneficial to pay off the mortgage early. Thats because a portion of your mortgage interest becomes tax-deductible when youre self-employedthis deduction helps to bring down your taxable income.
Also, if your property is both your home and an investment property, it may not make sense to focus on paying off the mortgage quickly. Instead, investors should focus on paying off the mortgage on their primary residence first, before tackling the mortgage on an investment property.
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The Biggest Downside To Paying Off Your Mortgage Early
There are several studies citing the psychological benefits of paying off debt early, such as emotional relief and the strength to avoid slipping back into debt.
All of that is true. But the biggest downside that no one talks about is the complete loss of motivation to take on calculated risks and to work as hard as you can to grow your wealth.
After being mortgage-free, my and wife and I lived comfortably off the severance checks that we negotiated when we quit our six-figure jobs in finance , and the $150,000 in annual passive income mostly from real estate, dividend stocks and bonds.
But my entire attitude slowly changed once I sent that final mortgage check. I stopped aggressively looking for new freelance consulting work. I went from taking on three contracts per month to just one. So instead of working 60 hours, I was only working 20 hours. At around $10,000 per contract, I was losing out on $20,000 of monthly income.
To reward ourselves for paying off the mortgage, my wife and I also took a month-long trip to Asia. We visited friends overseas and saw the Ruins of Angkor in Cambodia, then spent weeks camping in Yosemite. After that, we flew to New York for two weeks to watch the U.S. Open. We spent more than $10,000 on the entire trip.
It was a lot of time off so much, in fact, that I was behind by $50,000 on my goal to reach $200,000 in annual passive income. The plan was to grow our money so we could feel financially secure by the time we had a baby.
You Can Convert Your Equity To Cash
The more you pay off your mortgage, the more equity you will build in your home, and the better your financial options become for leveraging that equity. Eventually, you can get a home equity line of credit, or a cash-out refinance.
You can use the cash you get from these new loan options to renovate your home, pay for emergencies, or invest in another property.
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Reasons Not To Pay Off Your Mortgage Early
If youre thinking of using cash reserves or savings to pay off your loan, you should understand that this may increase your risks and may not be the most prudent use of your cash. While paying off your mortgage loan early is usually a good idea, there are situations where it may not be best use of your free cash flow. Though you would still have your home equity to tap into, selling your home and accessing those funds may prove difficult. Your ability to do so will depend on other factors, including the local market, interest rates and supply and demand. These factors are hard to predict and could change by the time you need to sell. Therefore, its important to maintain a minimum level of cash to meet emergency expenses.
There are also market concerns to consider. Inflation actually devalues any cash you hold uninvested. Assuming inflation continues to rise, the purchasing power of every dollar you hold in cash erodes over time. However, by making all your payments at once, rather than hoarding it in cash savings, your moneyand the house you put it toward owningcould be better protected from inflation and changing market conditions. While this may vary based on your unique real estate market, home values generally appreciate at a rate faster than inflation.
How Much Can I Save By Paying Off My Mortgage Early
How much you can save will depend on your method of overpayment, the amount you overpay by, and the terms of your mortgage.
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 will 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 concession 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 will still be worth it. If you time it correctly and do your calculations in advance you can continue to overpay without incurring any early repayment penalties.
But is it always better to pay off your mortgage early? Presuming you have the extra cash to overpay your mortgage each month, could your money be better spent elsewhere? Should you pay off a mortgage or save?
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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.