Purchasing a house is one of the most significant investments most people make in their lifetime. First, we want to get mortgage approval as soon as possible, then choose a house as soon as possible, buy it as soon as possible… And, of course, pay off the mortgage as soon as possible! Paying off your mortgage early is not a quick process. It requires a carefully thought-out strategy that involves weighing the advantages and disadvantages. Should I pay off my mortgage early? This article contains the answer.
Can I pay off my mortgage early?
The brief answer is yes. Otherwise, you wouldn’t be reading this article.
Paying off a mortgage takes several decades, so it’s no surprise that many people want to save on interest. Yes, you can become the full owner of your own home and not worry about making monthly payments.
Every month you pay your mortgage lender, and this payment is divided into two parts — between principal and interest. When you first start paying your mortgage, most of that payment is applied to the interest — this allows the lender to get back most of their money within the first few years.
The key to repaying the debt quickly is to make extra payments that are applied to the original amount owed.
Do I have to pay off my mortgage early?
Possible — does not mean necessary! If you are simply uncomfortable making additional payments, no one can force you to do so. On the other hand, if you decide to pay off your mortgage early, check out the advantages and disadvantages of this process. To make the right choice based on confirmed information.
Benefits of paying off your mortgage early:
- Savings on interest. The less time you pay, the less your interest will be.
- Free up money for something new. Of course, mortgage payments are significant in our budget, so it’s nice when this amount can be spent on something else — for example, on a round-the-world trip. But of course, after the repayment of the loan.
- Increase in own capital. You can use it with HELOC or cash refinancing.
Disadvantages of paying off your mortgage early:
- There is less money left to pay off debt with higher interest rates. For example, you may need more money if you need to pay off a student loan.
- Less money to save. While trying your best to pay off your mortgage faster, it’s easy to forget about the financial airbag. It’s essential to prepare for unexpected events in life, which is why we suggest having a personal emergency fund that can cover your expenses for three to six months. So you can cope with any unforeseen circumstances and at the same time not get into debt.
- You can miss out on a higher return on investment. For example, instead of making additional mortgage payments, you may earn income well above your mortgage rate. In general, think about whether you are missing out on profits. For example, if your mortgage rate is 4% and your investment portfolio is earning 6%, then the choice is clear.
Consequences of early mortgage repayment
Okay, let’s say you paid off your mortgage early. But now, you will no longer have the interest to deduct from your tax return. This change will likely affect your life if you have a large mortgage and a high-interest rate. And your monthly payments are pretty high. Also, some lenders charge penalties for early mortgage repayment — therefore, check this point in advance.
Ask yourself a few questions if you’re thinking about paying off your mortgage early:
- What will I do if I need money urgently? After all, a new loan can be expensive. And you will need a high credit score and income to get a home loan.
- How low is your mortgage rate? Because if it is below the inflation rate or your income, it simply does not make sense to pay off the mortgage ahead of schedule.
- How much do I care about owning my house? You may be surprised, but early mortgage repayment does not make sense for many people — they do not care about this issue.
Strategies for accelerating your mortgage repayment
Review your budget
The most common strategy is simply paying more than the monthly loan amount. Therefore, take a closer look at your finances. You should save it somewhere. Even $20-30 extra in your loan payments can help you save money in the long run. We do not in any way urge you to give up all pleasures. But try to understand where you can get extra money for early repayment.
And remember to pay off other loans! It is important!
Schedule additional payments
Let’s say you’re not comfortable making extra payments once a month — that’s okay. But you can earn additional payments several times a year. Sometimes it is even more effective than small but frequent surcharges.
For example, if you received a bonus at work or a small inheritance. This money can be used to pay off the loan. True, remember to indicate that additional funds need to be credited to pay off the principal debt. Otherwise, the lender uses the money to pay off mortgage interest early.
Refinance your mortgage for a shorter term
A 15 or 30-year mortgage is a standard option that keeps monthly payments low. But, if your income has increased or your lifestyle has changed, you can refinance your loan for a shorter period.
Of course, monthly payments will increase, but the repayment period will be reduced to a shorter one. Before refinancing, think about the cost of closing your mortgage — make sure that the cost of closing doesn’t cancel out the interest savings. Otherwise, what’s the point of all this?
Recast your mortgage
This strategy assumes you make one large payment to the principal balance account — usually at least $5,000. You can reduce your monthly payments and save on interest by recasting your loan. This can free up extra funds that can be used for larger amounts each month.
Of the minuses of such a plan is that reissuing a loan requires payment of a commission. And also the fact that not all types of loans can be reissued. For example, these are loans from the Federal Housing Administration (FHA) and the US Department of Veterans Affairs (VA).
Pay every two weeks
Quite an exciting and simple tactic without additional payments. You must pay not once a month, but once every two weeks and two smaller payments.
Here’s how it works: Most mortgages require monthly or 12 payments yearly. If you switch to bi-monthly payments, you make 26 payments per year—essentially one extra payment. Not only will this speed up your loan repayment, but it will also save you money on interest over the life of the loan.
Check with the lender in advance whether they allow this type of payment.
Should I pay off my mortgage earlier? Conclusion
There are many ways to early repay a mortgage — additional payments, refinancing, and recasting. The main thing is understanding all the pros and cons of paying off a mortgage. At times, there might be a fine associated with this action. Therefore, if you have any mortgage questions, it is better to ask the experts. Sign up for a consultation at LBC Mortgage, and we will help make the world of mortgage finance simple and understandable.