How Do I Work Out How Much Money I Will Save By Paying Off The Mortgage
First, you need to find out the monthly interest you are paying on your mortgage. Unless you are on an interest-only mortgage, this is not the same as your monthly mortgage payments, as they will include not just interest but capital repayments also. Either ask your lender what your monthly interest payment is, or calculate it from the interest rate that you are paying. They find out what interest you are receiving on your savings, and how much tax you are paying on that .
Then it is quite simple if your monthly mortgage payment is greater than the interest you are receiving after tax, you will be better off paying off your mortgage. As an example: say you have a £100,000 mortgage at 3%, and £100,000 in a savings account earning 0.5%, and you are a lower rate tax payer. Then the mortgage interest payments are £3000 a year, but the interest you receive is £500 a year . If you use your savings to pay off the mortgage you will be £2,500 a year or about £200 a month better off.
Should I Pay Off Or Prepay My Mortgage
If you already have a mortgage, you may find yourself with the means to make extra payments or pay it off entirely. Paying your loan off sooner can be especially appealing if youre close to retirement and want to lower your monthly expenses.
Most loans today allow prepayments, in whole or in part, without penalty. In other words, if you want to throw an extra $50 or $100 a month toward your mortgage, you can likely do it.
Realistically, though, not many borrowers keep a mortgage for 30 years or anywhere close to that. So, if you make extra payments, the result will be that when sell your home or refinance, youll owe less to your lender.
Just like with a cash purchase, if youre considering paying off your mortgage completely, keep in mind that there may be other, better uses for those funds. Remember that a mortgage can be considered good debt if its used responsibly, and your life plans may change, so its best to consider your goals and priorities carefully before making this decision.
When Should I Get An Agreement In Principle
Estate agents will often ask buyers for an agreement in principle before lining up viewings or accepting offers. Early in the buying process, the agent will ask for proof of funds, such as an AIP, to make sure you arent wasting anyones time. It is a good idea to have either an Agreement in Principle or to have discussed your financial situation with a lender to demonstrate proof of funds before you seriously begin house-hunting and before making an offer on a property.
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Standard And Collateral Charges
A mortgage is a loan secured by property, such as a home. When you take out a mortgage, the lender registers a charge on your property. The type of charge determines which loans your lender allows you to secure against your property.
A standard charge only secures the mortgage. It doesnt secure any other loans you may have with your lender, such as a line of credit. The charge is registered for the actual amount of your mortgage.
With a collateral charge mortgage, you can secure multiple loans with your lender. This includes a mortgage and a line of credit.
The charge can be registered for an amount that is higher than your actual mortgage. This allows you to borrow additional funds on top of your original mortgage in the future. You avoid paying fees to discharge your mortgage and register a new one. You only have to make payments, including interest, on the money you actually borrow.
Register To Vote Or Your Chances Might Be Scuppered
This is a potential dealbreaker. While you can have a perfect credit score without being on the electoral roll, it’s very difficult to get a mortgage without it. Lenders use electoral roll data in identity checks .
Your credit file will say if you’re on the electoral roll or not, but you can also check with your local council. Do this as early as possible. While you can usually be added within a month, in late summer and early autumn it could take longer.
If you’re not on it, you can register on the electoral roll for free. If you’re not a UK, Irish or EU national and thus can’t get on the electoral roll to vote, then you can put a notice of correction on your file, saying you have other proofs of address and ID you can offer lenders .
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Can I Get A Mortgage After I Retire
If youve retired, you could get a mortgage. A lender should accept you for a mortgage if theyre confident that youll be able to pay back your loan each month. It should help if:
- you have a decent amount of savings for a deposit.
- you have a strong credit score our guide outlines several things to look for in your credit report.
- you own your current home outright if you do, youll be able to access some of the equity thats tied up in your current property. This could be used as an up-front payment on another home or released as a cash lump sum with a lifetime mortgage. With this type of mortgage, there are no required monthly repayments so theres no need to prove an ongoing income to a lender. However, a lifetime mortgage could affect the value of your estate and entitlement to means-tested benefits.
- if you can show a lender proof of any ongoing income, youll be in a stronger position when applying for a mortgage. Examples could include a private pension or earnings from shares or other investments.
Its likely that youll have a longer history of borrowing as you get older. So, if youve proven to be responsible with your money in the past, you might be viewed more favourably by a lender.
When Should I Start Applying For A Mortgage
The best advice is to start the process of applying for a mortgage before you even start seriously looking for somewhere to buy. If youre looking at properties before starting to arrange your mortgage, youve left it too late. There are three reasons for this:
- You need to find out for sure how much you can afford. This is particularly important if youre in a more complex financial position, such as beingself-employed, or having just started up a company. Many home-buyers end up losing a property because they couldnt borrow as much as they thought
- It will ensure that the home-buying process isnt derailed by delays and problems with the mortgage. The secret to smooth home-buying is to reduce the surprises as much as possible. Read our guide to find out how long it takes to get a mortgage
- Youll be at an advantage compared to rival buyers who do not have a mortgage in principle. Most estate agents and their home selling clients will expect you to have a mortgage in principle when you make an offer
- If you are thinking about buying jointly with anyone or buying with a friend, then this will affect the sort of mortgage you can get, and how much you can borrow so you should sort this out before you start looking
Max Out Your 401s Employer Match
Many employers offer some degree of matching on their 401 plans. This matching is effectively free money, you should contribute at least enough to meet that employer match. If youre currently falling short of getting the maximum possible matching amount perhaps because money has been too tight to defer too much of your paycheck then its time to make it happen. See if you can take advantage of your extra wealth in a way that allows you to up your contribution and get that free money.
Once youve taken care of these three priorities, you can address either your mortgage or your investments. Heres when each option makes the most sense.
Which Option Is Better From A Tax Perspective
Purchasing a rental property will also be more beneficial from a tax perspective. Many people use their mortgage interest as a tax write-off, which you obviously cant do if you pay off the loan. This may not matter to you, since you wont be paying the monthly interest payments anymore. But keep in mind that youll have to make up for it when it comes time to do your taxes.
When you purchase a rental property, there are all kinds of tax deductions you can make. If you used a mortgage to purchase the property, you can write off the interest as an expense. You can also write off things like utilities, property taxes, and any repairs made on behalf of your tenant. A good accountant will be able to find a variety of different ways you can reduce your tax obligation, which wouldnt be possible if you simply paid down your mortgage.
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What Percentage Of Your Income Should Go Towards Your Mortgage
Your salary makes up a big part in determining how much house you can afford. On one hand, you may want to see how much you could afford with your current salary. Or, you may want to figure out how much income you need to afford the house you really want. Either way, this guide will help you determine how much of your income you should put toward your mortgage payments every month.
First: What Is A Mortgage Payment
Mortgage payments are the amount you pay lenders for the loan on your home or property, including principal and interest. Sometimes, these payments may also include property or real estate taxes, which increase the amount you pay. Typically, a mortgage payment goes toward your principal, interest, taxes and insurance.
Many homeowners make payments once a month. But there are other options, such as a twice a month or every two weeks.
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The Bottom Line: Should Retirees Carry A Mortgage Into Retirement
It’s never a good idea to blindly accept a piece of advice, even if it comes from the mouth of a financial planner. The safety of carrying a mortgage into retirement depends on a variety of factors. This strategy is not guaranteed to succeed and can substantially complicate your financial life. Most importantly, leverage is a double-edged sword and could have dire financial consequences for a retiree.
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Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner.
Benefits Of Having One Spouse On The Mortgage
There a several reasons amarried couple might want to purchase a home in one spouses name only:to protect the buyers interests, to plan their estate, to save money, or toqualify for a mortgage.
Avoid credit issues onyour mortgage application
Serious mortgage problems can arise when one personon a joint application has poor or damaged credit.
Thats because mortgage lenders pull a merged credit report with history and scores for each applicant, and they use the lowest of two scores or the middle of three scores to evaluate applications. The score they use is called the representative credit score.
Unfortunately with two applicants, lenders dontaverage out the representative scores. They discard the better applicants FICOscore completely and make an offer based on the lower one.
This could easily result is ahigher interest rate. Or, if your spouses credit score is low enough, you mighthave trouble qualifying for a loan at all.
Save money on mortgageinterest
If one spouse has passable creditbut the other has exceptional credit, the higher-credit spouse might considerapplying on their own to secure a lower mortgage rate.
This could save you thousands onyour home loan in the long term.
A few years ago,the Federal Reserve studied mortgage costs and found somethingstartling. Of over 600,000 loans studied, ten percent could havepaid at least 0.125% less by having the more qualified buyer apply alone.
Preserve assets if one spouseis debt-challenged
Tapping Your Home Equity During Retirement
The first thing you need to do is talk to your loan officer and accountant to determine your total interest costnet of the tax benefitwhich will tell you how much your investment portfolio needs to earn in order to pay off the interest rate charges of your mortgage. Next, you need to approach your investment advisor to discuss beating this investment hurdle, which leads to another set of considerations.
Knowing your desired rate of return is simple enough, but whether you can reasonably achieve that rate of return or tolerate the necessary risk is another story. Generally speaking, beating your mortgage cost will require a larger allocation to equities, which can entail substantial amounts of portfolio volatility. Frankly, most retirees are probably unwilling to accept such levels of volatility, especially since they have less time to ride out the market’s ups and downs. Another factor to consider is that most financial advisors rely on historical averages to estimate a portfolio’s future return. In other words, do not totally rely on return expectations.
Finally, the last major consideration is determining the percentage of your total net worth your home represents. The larger the percentage of your net worth your home represents, the more important this decision becomes.
Disability Waiver Of Premium Rider
If you become disabled, premium payments will be temporarily waived until you have recovered.
However, applicants can also get additional coverage riders. Because mortgage protection insurance limits the term length of policies to better match with mortgage terms, you wonât have the flexibility of a traditional term life insurance policy. You can choose to add 15 or 30-year riders to increase the term of your policy if needed.
Mortgage protection insurance protects your familyâs housing if you die prematurely and haven’t paid off your mortgage. But because it doesnât cover other vital costs, such as bills and everyday expenses, itâs best to buy a traditional term life insurance policy instead. If you are ineligible for term coverage, a mortgage protection insurance plan is a good backup.
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The Terms Of Your Loan
Some mortgage lenders penalize you for paying off your mortgage early. Does your loan have any prepayment penalties attached to it? Its important to understand all terms and conditions that come with your mortgage.
If there is a prepayment penalty, you may owe a large chunk of money for paying off your loan ahead of schedule. Prepayment penalties are most common during the early years of your loan.
In 2014, the Consumer Financial Protection Bureau approved regulations that limit prepayment penalties to the first three years on most mortgages secured on or after January 10, 2014. This limit caps your prepayment penalty at 2% of the prepaid amount for the first two years, and 1% in the third year. By law, you wont pay a prepayment penalty after the third year if you obtained your mortgage on or after January 10, 2014.
For example, if you had a 30-year fixed mortgage with a balance of $300,000 and had to pay a 2% prepayment penalty, it would cost you an extra $6,000 just to be mortgage-free.
How Do I Get An Agreement In Principle
Getting an agreement in principle is relatively simple. Once youve compared mortgages and found the best deal, you need to request a mortgage in principle from the lender. You will be asked for information about your income and expenditure. The lender runs a series of initial credit checks to see if you are likely to meet their eligibility criteria.
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You May Earn More Elsewhere
If current mortgage rates are lower than the average rate of return on the stock market, it may make more sense to invest your money rather than lock it up in a large purchase. Taking out a mortgage to buy a home is often compared to carrying a negative interest rate on your home loan. Conversely, by buying a home using 100% cash, you essentially lock in a rate of return equivalent to whatever current mortgage rate you could have taken out.
As a point of reference, the average return of the S& P 500 over the past 80 years was just over 9% per year. Compare this to the current average rate on a 30-year mortgage of approximately 4.2% as of the time of this writing, and it quickly becomes evident the potential investment earnings you might have foregone, assuming you took out a mortgage and invested the cash you would have spent on the house in a well-diversified portfolio of stocks and bonds.