What About Reverse Mortgages
A reverse mortgage, or “home equity conversion mortgage” , is a type of home equity loan for people 62 and older that converts a portion of home equity into cash. The lender makes payments to the homeowner, who maintains ownership of the home throughout his or her life. However, there are nuances to reverse mortgages, and the terms and conditions should be considered carefully since they affect your beneficiaries. In addition, because lenders require that you live in the home as your primary residence, youll need to repay the loan if you want or need to move.
Final Steps To Paying Off Your Mortgage Early
Once you’ve made your final mortgage payment, you’ll have to finalize everything so you can put the loan behind you and enjoy your fully paid-off home.
- Request your mortgage payoff statement: Your job isn’t done after you make your final mortgage payment, as you’ll have to request your mortgage payoff statement from your lender. This document shows that you no longer owe anything on your mortgage.
- Inform your city of ownership status: Either you or your lender will have to inform the city or municipality where your home is located that you are the official owner of the property. In many cases, you can do this online or request your lender do it for you. Remember, most mortgages pay your property taxes on your behalf from your escrow balance — once your mortgage is paid off, that becomes your job.
- Inform your insurance company: Now that your home is in your name, you’ll also be responsible for paying your insurance provider directly. Inform your insurance provider that you own the home and will be making payments going forward.
- Inquire about escrow funds: When you’re paying off your mortgage, your lender may keep funds for homeowners insurance and property taxes in an escrow account for you. Once you’ve paid off your mortgage, you can ask your lender to transfer any remaining escrow balance back to you.
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How To Pay Off Your Mortgage Early
If paying off your mortgage early is right for you, here are some strategies to do it:
- Make biweekly payments. One way to get started with making extra mortgage payments is to set up a biweekly schedule. This amounts to making a full extra monthly payment each year and can reduce the time spent with a mortgage. Starting with biweekly payments can help you get ahead on your mortgage while allowing you to keep working toward other financial goals.
- Make extra mortgage payments each year. Similar to making biweekly payments, you can simply make an extra mortgage payment once a year, or pay an additional amount each month on top of what you already pay. Be sure to coordinate with your lender so that these extra funds are allocated to the principal.
- Refinance to a mortgage with a shorter term. If you stand to get a lower interest rate, refinancing to a 15-year mortgage means youll pay off the loan sooner. Keep in mind that even with a lower rate, you could be paying more each month, since your payments are now spread out over a shorter period of time.
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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.
Compromise Position: Funding Both At Once
Between these two options lies a compromisefund your retirement savings while making small additional contributions toward paying down your mortgage. This can be an especially attractive option in the early phases of the mortgage when small contributions can reduce the interest you’ll ultimately pay. Or, if the market is being extremely volatile or spiraling downward, it might make more sense to pay down your mortgage instead of risking the loss of investment funds.
Since individual circumstances vary widely, theres no one answer as to whether its better to pay down a mortgage or to save for retirement. In each case, you have to run your own numbers. Overall, however, dont sacrifice the long-term savings goals of your retirement plan by focusing too much on your mortgage. By prioritizing your retirement-savings goals first, you can then decide if any additional savings are best spent on further contributions to your mortgage or on other investments.
In fact, you should balance paying down a mortgage against the return prospects of other, non-retirement savings options. For example, if your mortgage interest rate is far above what you can reasonably expect to earn, getting rid of it can be advantageous . Also, if you have an unusually high interest rate on your mortgage, it makes financial sense to pay down the debt firstor look into refinancing.
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Look Into Mortgage Recasting
A mortgage recast is when a lender recalculates a new loan balance and puts forth a new payment schedule, usually after the borrower makes a large payment toward the loans principal balance.
This new payment or amortization schedule will detail principal and interest percentages in each payment due from that point until the loan is scheduled to be paid off.
Since the new loan balance is naturally lower, a mortgage recast results in lower monthly payments for the borrower.
In Fact Put All Your Extra Money Toward Your Mortgage
The same principle holds true for any extra money you have while youre still paying off your mortgage. Whether youve got extra money from a raise, bonus, gift, tax return, inheritance, or even a lucrative night at bingo, put it toward the mortgage and get it paid off faster.
Michael Saves is a finance blogger who started writing about savings after paying off his $86,000 mortgage in just two years. A big part of his strategy was working more so hed have more money to put toward the mortgage.
First, I made a commitment to work 10 extra hours per week, so 50 hours total. In addition to volunteering for overtime at my full-time job, I waited tables on the weekends and took care of pets around the holidays, he says.
He also used apps like Mint to track his spending and make sure that he wasnt wasting too much money in other areas.
On top of scrimping and saving as much as he could, another big part of his approach was making sure every penny went to the mortgage: Any extra money that came my way went to the mortgage, including work bonuses, birthday cash and credit card rewards, he says.
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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:
Is It A Good Time To Buy A Home With Rates Where They Are
2022 started off with dramatic rate increases. But from a historical perspective, mortgage rates remain at comparatively normal levels.
With a combination of limited supply of homes and strong demand, home prices are up significantly from before the pandemic. The higher costs to build homes and the massive demand from buyers is also contributing to the surge. This, plus higher mortgage rates, makes the overall cost of homeownership more expensive for the borrower.
The difference of a half a point or so can equal a lot of money over a 30-year mortgage. But its best not to try to time the market to get the best mortgage rate. Experts say, instead, to focus on finding the right house, and make moves when your personal lifestyle and financial situation indicate its the right time.
Rates between mortgage lenders can vary significantly. Make sure to shop around between a few different mortgage lenders to ensure youre getting the best current deal. The rate highly impacts your monthly affordability for as long as you will hold this home, Skylar Olsen, principal economist at Tomo, a digital real estate and mortgage company, told us. It is actually a critical piece of this decision, and that takes shopping around.
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How To Pay Off A 30
There are a few ways to pay off a mortgage sooner than the 30-year term.
Options to pay off your mortgage faster include:
- Pay extra each month
- Pay off other debts
There are advantages to each approach. The choice comes down to careful study and a decision based on your financial position and ability to repay what will be higher monthly payments.
Should You Pay Off Your Mortgage Early
By Romana King on December 15, 2021
There are some serious advantages to paying off your largest debt early. But to make the best choice, first consider your options.
Lets face it, we all dream of a debt-free life, and paying off your mortgage can be a big part of that. Even if its a distant goal, its fun to imagine the financial freedom that comes with settling one of lifes biggest loansyour mortgage.
Thats just one of the reasons paying off mortgage debt should be on every homeowners priority list. It can also save you tons of money in interest fees. That doesnt mean you dont have other potentially lucrative options, though. To determine if you should prioritize your mortgage debt, youll need to consider both the pros and the cons of paying off your mortgage. Is it better to pay on your mortgage now to save on fees later, or to invest your money instead?
To help, take a read of these scenarios.
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Investing In The Market
If a homeowner is considering paying off their mortgage early, it might be worth considering whether some or all of those funds would be better off invested in the financial markets. The rate of return earned from investing might exceed the interest paid on the mortgage for the final 10 years of the loan.
In other words, the opportunity costâmeaning the foregone interest that could be earned in the marketâshould be considered. However, many factors go into evaluating an investment, including the expected return and the risk associated with the investment.
The table below shows how much could be earned on $100,000 if invested for ten years based on four different average rates of return: 2%, 5%, 7%, and 10%.
|How Much $100,000 Can Potentially Earn in 10 Years|
The above investment gains were compounded, meaning interest was earned on the interest and no money was withdrawn during the 10-year period.
Income Tax Calculator: Estimate Your Taxes
On the surface, Jack is making the wiser financial decision. But then, both homeowners are affected by an unexpected financial crisis and can no longer pay their mortgage.
For the bank, its an easy decision: theyre incentivized to take Jacks house because theres more equity in it. With Jacks house, it will be easier for them to turn around and get their cash back, versus losing cash upon the sell of the house.
This is what I meant by equity jail. Banks love to lend money to people who dont need it. If you need the money, theyll say, Youre in turmoil, so were not giving you this money. Instead, if you miss payments we will foreclose, sell the home and even keep the equitybecause its ours now.
Is it fair that the person who was paying more gets penalized in this situation? Of course not. But thats the reality of the situation: paying more than necessary is risky.
Dont misunderstand me: Im not against paying off your mortgage early. Im simply advocating for a different method, one that doesnt leave your money in equity jail.
If Jack wouldve saved his money on the side instead of making extra mortgage payments, he wouldve maximized his tax deductions, kept his options open, and had more stability and control.
Then, when hed accumulated enough cash in the account, he couldve written one check and paid off his mortgage in one fell swoop. Or, when financial hardship struckand it will strike all of us in some formhe couldve kept paying his mortgage.
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Should You Pay Off Your Mortgage Or Invest In The Stock Market
On the one hand, given the current low-interest rate environment, investing could be much more profitable than paying off a fixed-rate mortgage with a low rate. On the other, being debt-free could provide homeowners great peace of mind.
If you were to find an investment that could generate an after-tax rate of return that is higher than your current mortgage rate, investing could be a better deal.
Going back to the example in the previous section, if you had a 30-year mortgage with a 4% interest rate and could pay an extra $500 each month, you could get out of your mortgage 10 years earlier and save around $63,442 overall. If you chose to invest those $500 in a stock market fund instead and continued investing the same amount each month for 20 years, assuming an annual return of 7% , your investment could be worth $247,908 at the end of that period.
While the numbers might make this decision seem like a no-brainer, the choice should come down to your personal financial situation, says Haley Tolitsky, CFP at Cooke Capital. “Remember, you actually need to invest the funds that you would be using to pay down your mortgage consistently, and the stock market can be volatile in the short-term, so make sure you are investing for the long-term and understand the risks of investing first,” she adds.
Here are some of the pros and cons of investing:
Make Extra House Payments
Lets say you have a $220,000, 30-year mortgage with a 4% interest rate. Our mortgage payoff calculator can show you how making an extra house payment every quarter will get your mortgage paid off 11 years early, and save you more than $65,000 in interestcha-ching!
But before you start making extra payments, lets go over some ground rules:
- Check with your mortgage company first. Some companies only accept extra payments at specific times or may charge prepayment penalties.
- Include a note on your extra payment that you want it applied to the principal balancenot to the following months payment.
- Dont shell out your hard-earned cash for a fancy-schmancy mortgage accelerator program. You can accomplish the same goal all by yourself.
What Does Paying Your Mortgage Biweekly Do?
Some mortgage lenders allow you to sign up for biweekly mortgage payments. This means you can make half of your mortgage payment every two weeks. That results in 26 half-payments, which equals 13 full monthly payments each year. Based on our example above, that extra payment can knock four years off the 30-year mortgage and save you over $25,000 in interest.
Are Biweekly Mortgage Payments a Good Idea?
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Negotiate For A Better Interest Rate
Negotiate with your current lender. You may qualify for a discounted interest rate that is lower than the rate quoted in your renewal letter. Tell your lender about offers you received from other financial institutions or mortgage brokers. You may need to provide proof of the offers you receive. Make sure you have this information on hand.
If you dont take action, the renewal of your mortgage term may be automatic. This means you may not get the best interest rate and conditions. If your lender plans on automatically renewing your mortgage, it will say so in the renewal statement.