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.
What Documents Can You Expect
The documents you receive may depend on your loan servicer. Heres what you can expect, which documents are essential and which ones you can make do without.
If you dont have proof within about 90 days that the certificate of satisfaction has been recorded, you may need to contact your loan servicer and speak with the lien release department.
Switch To An Offset Mortgage
An offset mortgage works by linking your savings account to your mortgage. All the money you have saved up will be taken off the mortgage balance. So your interest payments should be lower as you’ll only be charged interest on the mortgage balance minus your savings. With an offset mortgage you could also use your savings to overpay your mortgage and repay it early.
Being able to pay off your mortgage early is a great privilege, but it may not always be the right financial decision for you. Before you make that decision, be sure to shop around for remortgage deals, check if you could get a decent savings account or pension, or simply choose to pay off your other, more expensive debts.
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Pay Your Mortgage Every Two Weeks Instead Of Once A Month
Typically, when you pay off a mortgage, you make one payment each month to your lender. But if you want to get rid of that home loan sooner, switch your payment schedule so you’re sending your lender a check every two weeks for half of your regular monthly payment. In the course of a year, you’ll end up making a couple of extra payments, which will help you whittle down that debt faster.
Make An Extra Mortgage Payment Every Year
Throw all or a portion of new-found money like a year-end bonus or inheritance at the mortgage. The earlier into the loan you do this, the more of an impact it will have. In a typical 30-year mortgage, about half the total interest you pay will accumulate in the first 10 years of your loan. That is because your interest rate is calculated against the very high principle amount you owe in the early years.
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What If I Didnt Pay Off The Mortgage Early
Lets explore what would have happened if I had invested that money into the stock market instead of paying off my home. If I had purchased the S& P 500, back when I bought my house and held it until I paid off my mortgage , the total return from the S& P 500 would have been 46.04% with dividends . On face value, that would have been a higher compounded annual rate of return at 4.6% with dividends reinvested versus the 2.9% from paying off my mortgage early.
I went a step further with huge help from ERN, from Early Retirement Now, who calculated that if I had dollar-cost averaged the $900, the actual return would not be 4.6%, but actually 5.8% when you consider all the dips and dives that the market took during this period ***
Therefore, given the difference between the two figures, I theoretically would have had double the return if I had invested in the stock market .
[PoF: If I was still carrying a mortgage, Id probably celebrate the arbitrage of carrying tax-advantaged low-interest debt while investing in index funds with a higher projected return. That was my line of thinking for years.
However, now that I have been debt-free for several years, I better appreciate the sleep at night factor and behavioral finance aspects of living a life indebted to no one.
If you enjoyed this post, be sure to check out more great articles from the author at Mustard Seed Money.
Is Your Mortgage Payment Calculator Free
Yes, our mortgage payment calculator is free. In fact, all of our calculators, articles, and rate comparison tables are free. Ratehub.ca earns revenue through advertising and commission, rather than by charging users. We promote the lowest rates in each province offered by brokers, and allow them to reach customers online.
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How Much Do You Value Peace Of Mind
Sometimes its less about the bottom line and more about peace of mind. If you own your home free and clear, that can provide benefits that cant be measured in strictly financial terms. For many, eliminating a monthly mortgage payment ahead of retirement can provide mental relief when considering living on a fixed income.
Personally, Im paying down my mortgage, says Thomas of Mission Wealth. It feels good to have it paid off before retirement. It might not always make financial sense, but it offers peace of mind and it might allow for better budgeting.
Another potential advantage is the ability to borrow against the equity in your home. Having a considerable amount of equity can allow you to establish a home equity line of credit , providing a source of emergency income, as well as allowing you to make home improvements or make progress toward other financial goals.
Private Student Loan Debt Repayment Timelines
Private student loans, for the most part, come from academic institutions as well as banks and credit unions. The total amount of private student loan debt is difficult to track because little of the related data is a matter of public record.
- 1.2% is the lowest known private student loan interest rate, available only to those with excellent credit.
- 3.82% is the low-end private student loan interest rate for most student borrowers.
- 14.5% is the high-end interest rate.
- Most students owe between $20,000 and $40,000 in student loan debt.
- 56% of indebted borrowers owe $20,000 or less in student loan
- 34.3% of indebted student borrowers owe $10,000 or less in federal student loans.
- 17.1% of borrowers owe less than $5,000.
- 21.4% of borrowers owe between $10,000 and $20,000 in student loans.
- 18.4% owe $40,000 to $100,000.
- 7.4% owe $100,000 or more.
- 2% owe in excess of $200,000.
Making Sure Youve Got Extra Flexibility
These added costs dont mean you shouldnt take advantage of lower repayments, especially if paying less each month is the only way you can afford to get on the housing ladder.
However, its worth checking the mortgage deal to see if you can overpay. Being able to do this without penalties gives you added flexibility if you get a pay rise or a cash windfall. You can also pay the contractual amount if times get tough.
Its certainly worth thinking about as any extra money you put into your mortgage over your standard monthly amount will shorten the total length of the mortgage, saving you additional interest over the lifetime of the mortgage.
Refinance To A Shorter Term
Another option involves refinancing, or taking out a new mortgage to pay off an old loan. For example, a borrower holds a mortgage at a 5% interest rate with $200,000 and 20 years remaining. If this borrower can refinance to a new 20-year loan with the same principal at a 4% interest rate, the monthly payment will drop $107.95 from $1,319.91 to $1,211.96 per month. The total savings in interest will come out to $25,908.20 over the lifetime of the loan.
Borrowers can refinance to a shorter or longer term. Shorter-term loans often include lower interest rates. However, they will usually need to pay closing costs and fees to refinance. Borrowers should run a compressive evaluation to decide if refinancing is financially beneficial. To evaluate refinancing options, visit our Refinance Calculator.
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Find A Lower Interest Rate
Work out what features of your current loan you want to keep, and compare the interest rates on similar loans. If you find a better rate elsewhere, ask your current lender to match it or offer you a cheaper alternative.
Comparison websites can be useful, but they are businesses and may make money through promoted links. They may not cover all your options. See what to keep in mind when using comparison websites.
If Your Circumstances Have Changed
If you’ve recently been given a pay rise at work, or come into extra cash, you might feel like it might be a good time to put some of that extra income towards repaying your mortgage faster.
If you have a lump sum of cash, you could put all of it down to make one large mortgage repayment or spread it out to increase what you currently pay each month.
However, before you do this it’s important to check the terms of your mortgage deal to ensure you won’t be hit with a penalty fee for paying off your mortgage early.
Many mortgage providers will allow you to overpay by up to 10% per year without incurring a penalty. You will need to check if any such concessions are valid over any 12-month period or simply begin in January of that year.
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So Should You Pay Off Your Mortgage Early
If you find yourself with a little extra cash at the end of the month, should you put it toward your mortgage loan? Theres no simple yes or no answer. There are both risks and benefits to paying off your loan early, and the right decision will be different for everyone. In this section, well look at a few instances in which it makes sense to pay off your mortgage early and when it doesnt.
Pay Off The Mortgage First
Reason No. 1: Save money
Every loan comes in two parts: the principal and the interest.
The principal is the amount you want to borrow. For instance, if you have $100,000 saved but you want to pay a $550,000 home, you will need to borrow $450,000 in order to complete the transaction. That $450,000 in the principalthe money youve actually borrowed.
The interest is the fee you pay in order to borrow the money. Its the cost of using someone elses money to buy an asset.
In Canada , its standard to amortize a mortgage loan. All this means is that the loan repayment is scheduled equally over a set period of time. This enables the lender to calculate the expected earnings of their risk , as well as establish a timeline for when the loan will be repaid in full.
The easiest way to save money, when it comes to mortgage debt, is to reduce the amount of time it takes to repay the principal debt. For example, if you borrowed $450,000 and the amortization schedule was for 25 years with an interest rate of 3%, you would actually pay just a little under $639,000 back to the lender . In other words, you paid the lender close to $190,000 in interest on a $450,000 loan. Reduce the amortization of that loan to just 15 years and you shave $80,000 off the interest payments you make to the lender.
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Reason No. 2: Financial freedom
Why Does Your Monthly Calculator Have Four Columns
We think it’s important for you to compare your options side by side. We start the calculator by outlining the four most common options for down payment scenarios, but you are not limited to those options. We also allow you to vary amortization period as well as interest rates, so you’ll know how a variable vs. fixed mortgage rate changes your payment.
Mortgage Payoff Final Thoughts
There is so much information about mortgage payoff out there, its hard to keep track. Remember that you need several documents when you pay off your house.
These include the canceled promissory note, discharge of mortgage, and the house deed.
You also need to remember that you must now pay property taxes and insurance on your own without the help of a lender. You are responsible for home repairs as usual.
There are a lot of benefits to paying off your house, and you can do a lot with the extra money once you do get rid of your mortgage for good. Some ideas for this are to invest, save for retirement, or give to a charitable organization.
House value increases over time, and you can possibly increase it even more with remodels or by renting out your home with no money going towards a mortgage.
While paying off a mortgage doesnt happen overnight, it is possible over time. Remember to use any extra money you have wisely and try to pay off your home in fewer years than your mortgage is for. Youll save some of your cash by not paying it towards interest, and youll be debt-free quicker.
Enjoy the extra cash and security of owning your home completely. You may choose to never have a mortgage again and always have lower expenses because of this.
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Refinance To A Lower Rate
Homeowners can save money by refinancing to a lower rate, or by converting an adjustable rate mortgage into a fixed rate which remains locked for the life of the loan. If you would make higher payments if forced to, but would otherwise struggle to make the higher payments then it may make sense to opt for a 15-year mortgage rather than a 30-year loan. The shorter duration loan will typically have a lower interest rate & since the loan will be paid off faster you’ll spend far less on interest. For your convenience, here are current rates in your local area.
One thing to note about refinancing is there are some fixed costs in setting up a new mortgage even for streamlined refinancing. If you will live in your home for many years then locking in a lower rate makes a lot of sense, but if you plan on moving in the next few years it may not be worth the cost of refinancing unless you needed to get cash out or had another reason to set up the new loan. In cases where a homeowner needs a small sum of money a HELOC may be a superior option to refinancing the entire mortgage.
Consider An Offset Account
An offset account is a savings or transaction account linked to your mortgage. Your offset account balance reduces the amount you owe on your mortgage. This reduces the amount of interest you pay and helps you pay off your mortgage faster.
For example, for a $500,000 mortgage, $20,000 in an offset account means you’re only charged interest on $480,000.
If your offset balance is always low , it may not be worth paying for this feature.
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What Else Should I Consider
Theres no question that the figures above show a fantastic benefit from putting extra funds into your mortgage but that doesnt necessarily mean if you are in this position you should do it, there are other things to consider.
The extra funds may serve you better if you put them towards building a diversified investment portfolio, this will protect you from industry specific shocks. Investment opportunities like Kiwisaver can be a prudent use of money above your mortgage and livings costs.
There are a lot of factors to consider and the decision will depend your lifestyle and goals in the short to long term future. If you find yourself in this position and you are unsure what the best path is you should seek the advice of a qualified financial adviser.
Saving Money By Getting Below Pmi Requirements
Mortgage companies require PMI when the borrower does not have 20% or more for a down payment. It is protection for the lender in case the borrower defaults on the loan. So, if a home was purchased with less than a 20% down payment, the bank is probably charging PMI. However, once the borrower owns 20% of the home, this charge could be eliminated. Some borrowers take out a second mortgage to bypass the PMI requirement.
Some banks may automatically charge for PMI until you loan-to-value is at 78%, but you can call them when your loan hits 80% to get PMI charges removed.
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