Are you dreaming of owning a home? It’s quite natural that you want to pay off your mortgage as early as possible to enjoy living in your own house and no doubt, this is one of the biggest achievement in one’s life to own a home but paying off mortgage feels like skating on thin ice that you may fell down anytime if you don’t pay your mortgage. It feels daunting that you’ve a lot on your plate to cope with. For some people, it takes decades to pay off a mortgage. If you’ve gotten a large financial fortune or accumulated a significant amount of money over the years, it may be enticing to pay off your home debt early. Paying off the mortgage early is a wise decision but it totally depends on your financial situation, the interest rate on the mortgage, and how near your retirement is.
Your financial condition will decide whether you have to pay off your mortgage early or not. So, before you make a decision to sacrifice an inheritance, a promotion, or your assets to pay off your mortgage, consider if it makes sense economically for you. However, you cannot devalue the peace of mind that you will get after paying off your mortgage early. Let’s discover whether it is right to pay off your mortgage early or not?
What Is Mortgage?
A mortgage is a loan used to purchase a property. You will deal with a bank or another loan provider to obtain a mortgage. To begin, the lender will decide whether you qualify for a mortgage loan or not. This will determine whether the lender is happy to lend and also decide the interest rate you’ll pay. This helps to calculate the cost of your mortgage and begin your property hunt.
A mortgage loan is often a long-term loan taken out for 30, 20 or 15 years. During this period, you will pay both the debt and the interest paid on the loan. You’ll return the mortgage at regular periods, commonly in the form of a monthly payment that includes both principal and interest costs.
What Is Mortgage Payment And What Are Its Elements?
A mortgage payment consists of principal amount, interest, taxes, and insurance.
The principal amount is the original amount of money you borrow from a mortgage company to buy a house. If you buy a $100,000 property and borrow $90,000 to foot the bill for it, the principal you have is $100,000.
The lender sets your interest that you have to monthly with the monthly payment. Each month, interest accumulates, and your monthly bill will satisfy all of the interest that has accumulated that month. Aside from interest, there are additional fees associated with obtaining a mortgage, such as points and other closing costs.
Your lender collects property taxes along with your monthly mortgage amount. The funds are often stored in an account held, which the lender agreed to fund your property tax obligation when it becomes payable.
Should you pay off your mortgage?
There can be many reasons to justify that it’s better to pay your mortgage asap but you’re the only one who can answer this question correctly because your financial condition might differ from your neighbour or any other person.
There are so many people who are capable of paying a mortgage loan as soon as possible. Many people feel it is feasible to pay off mortgage for 15 or 30 years while others lose sleep over it.
Here are some points to think about when deciding when to pay off your mortgage.
Case 1: You Should Pay Off Mortgage Early
- To get rid of the burden of high interest, you may wish to pay off your mortgage early.
- If you’re paying off more than the current rate and are unable to negotiate, a mortgage payback may be a better option.
- You have enough emergency funds and insurance. Paying off a mortgage gives another line of defence to your goals.
- Your retirement is completely paid for. Those additional savings are not required elsewhere.
Case 2: You Should Not Pay Off Mortgage Early
There are several reasons when paying off your mortgage early may not be worthwhile at this time in your life.
- You have a reasonable interest rate. Rates are incredibly low i.e. 3%.
- You need to enhance your emergency funds.
- Paying down a mortgage demands you to drain your cash reserves, which may end up leaving you without a safety net. Priority should be given to saving for unforeseen events.
- You’re receiving a good tax break. Mortgage interest, if deducted, may reduce your taxation even further.
- You also have a high-interest loan. Money that charges more than your mortgage should be prioritised for early repayment.
- You’re not concerned about your mortgage. If you aren’t burdened by mortgage loan and your wallet isn’t being strained by the payment, there may be little incentive to pay it
Tip: If you have the financial means to pay off a mortgage sooner, try switching to an every-other-week payment plan, rounding up the sum you pay, or making one additional payment every year. You can utilize an overpayment calculator to estimate how much you save on interest and the number of years you cut. Finally, the decision to maintain or pay off your mortgage is yours that is influenced by how you think about your financial status. It’s about you and your desire.
Ask A Few Questions From Yourself And Decide
Do You Have Any Additional High-Interest Debts?
Expensive debts are ones that will cost a lot of money to repay over time. Like you may have credit cards that carry a significant rate of interest. Personal loan with interest rates substantially greater than the cost of your mortgage debt might be another costly obligation. Always pay off higher-interest obligations before considering mortgage reduction but be cautious not to build them up again.
Will the mortgage consume all of your funds?
Before you spend a big portion of your cash to pay off your mortgage early, consider liquidity.Because it might take months or more to sell your home and retrieve the funds, it is classified as a non-liquid property.
One strategy is to keep emergency cash on hand, as well as assets such as stocks, mutual funds, bonds, and liquid assets in a taxable savings account. That way, you’ll have some liquid cash or other assets that can be easily converted to cash in an emergency.
What will you do with the money if you don’t pay off the mortgage loan early?
Be honest with yourself about what you’ll do with your wealth if you don’t use it to pay off your mortgage early. Will you spend the money you save once you pay off your mortgage?
If you have trouble holding money in the bank, it can make sense to put the money toward paying off your mortgage early. Making additional mortgage payments can save you hundreds of dollars in interest over time while also allowing you to develop equity in your house faster. You can also get precise estimate of how much you save on interest by using mortgage overpayment calculator. Mortgage overpayment calculator reduces monthly payments.
What Else Can Be More Valuable Than Peace Of Mind?
Sometimes, peace of mind becomes the most important consideration. If you own your house outright, you can reap the rewards that cannot be quantified in monetary terms. Many people find that paying off a monthly mortgage payment prior to retirement can give emotional peace.
It gives peace of mind and a feeling of satisfaction if you don’t have any debts left after your retirement so that you’re not on the icy ground after your retirement. It might not be good with respect to your financial condition but sometimes it is all about the peace of mind that wins the game.
Benefits And Drawbacks Of Paying Off Your Mortgage Early
- If you pay off your mortgage early, you can utilize extra funds for some other purposes.
- You can eliminate interest and save big bucks.
- Provides a consistent rate of return, equal to the interest rate on the amount you’re paying off debt.
- What else can be a greater thing than enjoying peace of mind? This is what you can relish after paying off your mortgage early.
- Locks up a significant portion of your cash flow and personal wealth in your property, which may make it difficult to retrieve later.
- The federal mortgage interest tax deduction is no longer available.
- Other investments with larger prospective returns may be overlooked.
- If the market declines and you have to sell soon, you may not get as much money from your house as you had intended.
Strategies To Pay Off Your Mortgage Early
If you believe that paying off your mortgage early is the best option for you, consider the following strategies:
- Pay fees every two weeks. Setting up a biweekly plan is one method to get started with additional mortgage payments. This equates to a complete additional monthly payment every year that can cut the time invested on a mortgage. Beginning with fortnightly installments will help expedite your mortgage while still progressing toward other financial objectives.
- Make additional mortgage payments every year. Just like biweekly payments, you can pay off your extra mortgage every year or make additional payments monthly. Make sure to get in touch with your lender to ensure that any extra monies are applied to the principal. You can use a mortgage overpayment calculator to know how much money you save on interest.
- Refinancing to a 15 year mortgage will enable you to pay off the mortgage if you’re capable of a low interest rate. Remember that even if you have a reduced interest rate, you may end up paying more each month since your installments are now stretched out over a brief span of time.
When deciding whether to pay off your mortgage early, you have to analyse your financial condition before making this decision because it can put you in hard times also. Your decision must meet your short- and long-term financial goals. Financial management isn’t always a simple evaluation of what’s best by the statistics. People want to know where their cash is spent, regardless of what the chart indicates.
For others, debt generates anxiety, and paying off a mortgage early might provide relief. People approaching retirement will have significantly greater cash flow from their fixed income after they cease working if their mortgage is paid off.