So Is It Worth Paying Your Mortgage Off Early
Lets recap. While there are many reasons you should consider paying off your mortgage as soon as possible, there are a few instances in which it may make more sense to use that money elsewhere.
The pros of paying off your mortgage early:
- Save money on interest. The fewer payments you set up to pay off your mortgage loan, the less you pay in interest. Paying off your mortgage early could save you tens of thousands of dollars. Just make sure to clarify with your lender that the extra payments will be going toward your principal, not the interest.
- No more monthly payments. Pay off your mortgage and you eliminate monthly mortgage payments and free up cashflow to put toward other goals, such as retirement savings or a childs education fund.
- You own the home outright. When there is no debt to repay, then you completely own your homeas well asthe equity included in that assets value. Not only does this give you more freedom, particularly if you hit a financial setback, but it also means you can use the equity to help achieve other financial goals.
- Peace of mind. For conservative or risk-averse savers, not dealing with a mortgage debt brings peace of mind. Even for more risk-averse investors, owning a home provides peace of mind as it allows you more flexibility on what to do with current earnings and accumulated equity.
The cons of paying off your mortgage early:
It’s A Question Of Whether You Save Or Whether You Overpay Your Mortgage
With savings rates near rock bottom, overpaying on your mortgage is often a no-brainer as it’s an easy way to save £10,000s in interest. But it’s not right for everyone you’ll lose access to the cash and could face repayment penalties. This guide helps you decide if it’s right for you.
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Think About How Easily You Can Sell Your Investments
As property is an illiquid asset, this means it takes longer to access your money if you need cash for some reason quite quickly. Without a crystal ball itâs difficult to predict what youâll need, but the basic principle of investing is to make sure you have a rainy day fund and room to move in your cash flow if interest rates rise or other expenses arrive.
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Why You Might Want To Pay Off A Mortgage
Dont be fooled by the relatively small numbers. The interest rates on a mortgage involve enormous amounts of money. Nationally, the average mortgage is around $275,000. At time of writing the average interest rate on a 30-year home loan was 4.146%. Your monthly payment on this mortgage would be $1,336.78. For the first payment, only $385.74 would go toward paying off the principal. The rest, all $951 of it, would be a pure interest payment. Next month, again youll pay $1,3336.78, and again approximately $950 of that money gets eaten up by interest.
Interest payments dont reduce your debt or improve your finances. As far as your money is concerned, you might as well just set that cash on fire. In our example mortgage above, youll make that fixed payment of $1,336 every month for 30 years, but it will take 13 years before more of that payment applies to your principal than your interest. By the time youre done youll have paid $275,000 for the house and $206,242 on interest. The faster you can pay off your mortgage, the less money youll spend on interest. And when were literally talking about hundreds of thousands of dollars, this is a big deal.
Can You Pay Off Your Mortgage Early
In most cases, homeowners can pay off their mortgage early, provided you follow certain ground rules and make sure the terms of your loan.
The first step is to recognize how your payment works. Early in a 30-year loan, the bulk of the payment goes toward loan interest. As the loan is closer to completion, the bulk goes toward the amount you borrowed, or the principal. But if the principal is lowered through extra early payments, the interest paid also is lowered. Paying down principal in the long run will reduce the total interest paid on the loan.
The more the principal is paid, the more the homeowner builds equity in the home. To easily figure the equity, calculate a fair price you feel the home is worth then subtract the loan balance. If a home could be sold for $300,000 and you have $150,000 left on the loan, you have $150,000 in equity.
When considering paying the mortgage early, be sure you know the answer to a question that many, especially first-time homebuyers, often do not consider: Is there a prepayment penalty on your loan? Many lenders do not have this penalty, but those that do will charge for making early payments. If you have any uncertainty, call your lender to ask specifically about prepayment penalty.
Once that question is answered, be sure to tell your lender if and when you make extra payments that you want that money applied to principal.
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Make Additional Monthly Payments
Of course, paying off your mortgage ahead of time will entail making additional payments, either monthly, annually or as a lump sum.
Choose a biweekly payment schedule
Paying half of your mortgage payment every two weeks will result in one extra full payment at the end of the year. The math is simple: 26 half payments will total 13 full mortgage payments every year.
This additional payment, applied to the principal, will shorten the life of your mortgage in small increments. Double-check the terms of your agreement and make sure your lender doesnt charge some sort of fee for setting up a biweekly payment schedule. Some lenders will allow you to automate biweekly payments, but you may need to manually pay your mortgage, which could result in accidentally missing a payment.
Pay extra each month
Another way to pay off your mortgage faster is by paying more than the required amount each month. Most lenders will allow you to automatically pay any amount you wish. So you can add just a few dollars or massively increase your payments, whatever works for your budget.
Some people even take out 30-year loans but commit to paying as though they took out a more expensive 15-year loan. This way, they can save time and interest but have the flexibility to pay less if needed.
To be clear, there are no hard and fast rules when it comes to making additional payments on your home loan. Also, there is no limit on the number of extra payments you can make.
Decreased Annual Living Expenses
According to the US Department of Labor, the largest expense in the typical American familys household budget is their mortgage or rent. Imagine that being completely wiped from your annual expenses. What a weight off your shoulders!
That would leave you more money for fun, vacations, investing for the future, contributing to your kids college funds and so much more.
Since our mortgage and extra principal payments were around 35% of our living expenses, we are breathing MUCH easier with our mortgage gone.
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Does Dave Ramsey Recommend Paying Off Mortgage
To be fair, Ramsey does not advise paying off your mortgage as a first step. He wants you to pay off all of your other debt first and then start setting aside 15% of your money to stick in mutual funds. … According to Ramsey himself, you’ll get a 12% rate of return if you put your money into an index fund.
Who Is Mortgage Payoff Best For
Paying off a mortgage early is often a consideration for homeowners looking to retire early or stay in their homes for an extended period of time.
Ultimately, the decision comes down to personal preference and whether the benefits outweigh the costs. Consider any prepayment penalty and the potential tax consequences. Also, conduct an inventory of your finances to determine if its more sensible to use the funds elsewhere, like to eliminate high-interest debt.
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Will Other Investments Beat Paying Off A Mortgage Early
Is it better to pay off your mortgage or invest? Ultimately, its a personal decision, but investing could be more sensible.
Sadly, the math tells us its almost always better to invest in other places than in your mortgage, says Richard Bowen, CPA and owner of Bowen Accounting in Bakersfield, California.
Mortgage rates are lower than theyve been in recent years, so if paying off your mortgage early leads to a return equal to your interest rate, that return would likely be lackluster compared to the annualized return for the S& P 500 roughly 10 percent over the last 90 years.
A potentially better use of the funds might be to take the cash youd use to pay off your mortgage and leverage it into buying a cash flow-positive property like multi-family real estate or single-family homes that have the potential to offer higher long-term returns, Bowen points out.
Any choice poses a risk, however. Even after paying off your mortgage early, real estate prices could plunge, leaving you with a potential loss. Carefully consider which risks youre willing to take. Ultimately, you might be better off not paying your mortgage off early.
The thing is, no one can give you a guarantee on an investment, Bowen cautions. You can put your money in the stock market and lose it. You can put your money in real estate and it doesnt perform as well as you expected it to.
Should I Pay My Mortgage Off In Full
If you pay your mortgage off before the payoff date the total amount you pay your lender will be less than it would be if you waited until the final pay off date. … If your monthly mortgage payment is greater than the interest you are receiving after tax, you will be better off paying off your mortgage.
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Shop For The Best Rate
Quite often, then, buyers will stick with banks or financial institutions they already know and have accounts with. But when shopping for the best mortgage rate, its actually better to cast your net wide and far. Consider outside-of-the box lenders, including credit unions and mono-lenders , as quite often these institutions can offer much better rates and terms than big banks.
You Have A Low Interest Rate On Your Mortgage
If your credit was excellent at the time you applied for your mortgage, you probably snagged a great interest rate on that home loan. This holds especially true if you took out your mortgage at a time when rates were more competitive as a whole. But if thats the case, paying off your mortgage early may not make sense. Thats because if you invest that money instead, you can earn more than the amount youd save with an early mortgage payoff.
Imagine your mortgage rate is around 4%. The stock market has averaged more than double that amount historically, so if you have spare cash, you may be better off putting it there than paying it into your mortgage.
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Your Mortgage Your Super Or Your Investments
Itâs tempting to pay off your mortgage as quickly as possible. But what about investing?
Building your wealth by paying off your mortgage, doesnât mean you shouldnât also consider other investment opportunities. With Australiaâs residential mortgage interest rates at historic lows you can pay off your mortgage sooner. But itâs worth considering whether you should use your savings to invest in other assets, such as an investment property or shares.
Itâs all about looking at a bigger picture of your wealth building strategy and the many options you can take to accumulate wealth.
Increase Your Regular Payments
To give yourself the best of both worlds, consider going with a longer amortization and increasing your regular payments using your mortgage loan prepayment privileges. For instance, if your monthly mortgage payment is $1,200, you could increase this to $2,400 per month, if your loan terms allowed for double-up payments. In effect, you would be paying off a 20-year mortgage in just 10 years. Better still, youd have the flexibility to switch back to the lesser regular monthly payment if you were to experience any changes like a sudden job loss or the birth of a child.
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What To Do After Paying Off Your Mortgagetop
Well done! Youve paid off your mortgage debt. But dont put your feet up just yet. There are a few things to consider next:
Does Inflation Make Loans More Expensive
In this case, the purchasing power of an American dollar decreases so that loan purchases become harder to make. It is for the same reason that investors need to pay more interest when using bonds. The cost of purchasing a mortgage rises when the cost of borrowing increases, since mortgage rates are usually determined by bond rates.
Check : Can You Overpay Without Penalty Most Can Overpay 10% Per Year But Get It Wrong And You Risk 1000s In Fees
Most lenders allow you to pay 10% of your mortgage balance as an overpayment per year if you’re still in your introductory fixed or discount period.
If you’re on a tracker mortgage, or you’re beyond that intro deal and paying your lender’s standard variable rate , you can usually overpay by as much as you want. But many SVRs are expensive, so if on one it’s best to check if you can save by remortgaging, rather than only overpaying.
However, the 10% rule is not universal. Some lenders punish those who try to overpay by more .
Fees for paying too much are typically between 1% and 5% of the amount overpaid depending on your mortgage, though the fee you pay usually decreases the closer you are to the end of the fixed or discount period. The amount you pay as a penalty will vary between mortgage deals.
Say you’ve a five-year fix on a £100,000 mortgage and decide to overpay a lump sum two years into the deal. However, instead of sticking to the 10% limit free of penalty, you overpay £15,000 instead.
This means you must pay a 3% penalty on the extra £5,000 overpayment £150. However, this ‘percentage left on loan’ rule of thumb is very rough, so always double-check with your lender.
The reason for such harsh penalties is because lenders want you to stick with them once the cheap rate ends and because they’ve also budgeted to earn a certain amount of interest from you during the mortgage deal, and overpaying means they’ll get less.
Why Do You Get Penalised For Paying Off Mortgage Early
Quite simply, lenders will want more money from you. The more slowly you pay back your loan the more they earn in interest.
Introductory fixed, tracker or discount period: most lenders allow you to pay 10% of your mortgage balance as an overpayment each year
Standard variable-rate deal: you can usually overpay by as much as you want, but check- some lenders charge a hefty fee.
Mortgages with flexible features: this includes offset mortgages, or with a borrow-back facility, allow you to overpay and borrow the money back without a penalty if you need it again. Interest rates are usually higher so the extra cost of the mortgage debt may outweigh any gain on savings.
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Tax Credit And Retirement Considerations
Paying off your mortgage in its entirety eliminates any tax deductions on your interest payments you can write off as a borrower. Currently, homeowners are allowed to write off the interest they pay on first mortgage loans up to $1 million. This lowers your taxable income and often increases your refund as a result. Paying off your mortgage altogether would eliminate this tax advantage.
Alternatively, paying your mortgage off early diverts funds that could have been otherwise applied to your tax-free retirement contributions. You could lose out on any interest you could have potentially earned on that account. Pre-tax 401 contributions are not taxed until withdrawn for retirement. Putting those same funds toward your mortgagerather than your retirement effortswould both reduce the future tax write-offs on your mortgage and cost you the interest that could have been earned with those funds.
Finally, paying off your loan early could also be negative for your credit. Payment history, credit length and variety can all influence your score, and credit companies prefer more loan variety than less, all else held equal. Mortgage loans improve your and offer you a chance to prove your creditworthiness. Early payoff closes a credit account and may result in a slight drop in your credit score and the loss of future opportunities to improve it.