If you’re like most Americans, your mortgage payment is your biggest monthly expense.
But there is some debate on whether paying off your mortgage early is actually beneficial.
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Paying Off Your Mortgage: The Debate
When it comes to paying off your mortgage early there are two types of people.
Ones that believe you shouldn’t pay off your home early because you can be using your extra money to invest.
And ones that say you should pay off your loan as soon as possible and then worry about investing.
But, who is right?
The truth is they both are, your personal preference and situation will determine what is right for you.
In this article we’re going to take a look at the benefits of paying off your mortgage early and how to do it.
Reasons to Pay off Your Mortgage
1. Significant Amount of Money Saved on Interest.
Paying off your mortgage early will dramatically reduce the amount of interest you will pay on the loan.
For example on a 200k home loan with a 4% interest rate you will pay $188,000 in interest over 30 years. However, if you pay off the mortgage in 10 years you will only pay $56,422 in interest, saving you $131,578.
2. No Mortgage Payment = Less Stress
No one likes having monthly bills and a mortgage payment is usually the biggest bill people have. being able to pay it off and eliminating the payment makes for a much less stressful life.
Not having a mortgage payment is a great feeling for everyone. Some view it as a major accomplishment while others feel a great deal of relief from owing their home outright.
3. Retire Early
It’s best to have your home paid off when you retire because in retirement your monthly income decreases significantly. It’s important to have few monthly bills so you can enjoy your retirement and do all the things you wanted to do when you retired.
Not having a mortgage payment allows you to have more money to travel and enjoy life.
4. More Money to Invest or Enjoy Life
Once a mortgage is paid off you’ll have thousands of dollars each year that you can use for vacations, paying off credit card debt, or investing to build wealth.
5. Take More Risks Like Starting Your own Business
When you dont have a mortgage to pay you’re able to take more risks. Quit that 9-5 job and open your own business because you dont have that large mortgage payment to worry about each month.
6. If You need Money use Your Home Equity to Get a Loan
One of the arguments against paying off your house early is not having that cash in a savings account in case you need it. However, homeowners are able to borrow up to 80% of their homes value.
Choosing to pay off your home over putting that money in a savings account may seem like a big risk. If you’re ever in a tough spot you can always get a home equity loan and access up to 80% of your home’s value.
7. Sense of Freedom and Accomplishment
There is a great sense of relief people feel when their home is paid off. There is a lot of comfort in knowing that whatever happens, whether it’s being laid off, medical issues, or a reduction in income you’ll always have your home and no one can take it away from you.
How to Pay Off Your Mortgage Sooner
Once you have decided to pay off your house early you need to figure out how.
Make Extra Payments
One way is just to make extra payments that will go directly towards the principle balance of the loan.
You can also pay extra each month, the additional money will go towards the principle balance. This will help reduce the amount of interest with each extra payment.
Bi-weekly payments is when you pay half of your monthly payment every two weeks. By makeing bi-weekly payments you will be paying 13 monthly payments instead of 12.
On a $250,000 mortgage a borrower can save $30,000 and pay off your mortgage 2-3 years faster.
Refinance into a Shorter Loan Term
If you’re like most homeowners you probably have a 30 year mortgage loan. But if you plan on paying off your home sooner than 30 years you can save even more money by refinancing your mortgage into a shorter loan term and getting a lower interest rate.
The mortgage rate on a 15 year fixed-rate mortgage is significantly lower than 30 year rates. 10 year mortgage rates can be even cheaper.
Remember you must be sure you can afford the new higher monthly payment of a shorter loan term. If you’re unsure you’re better off not refinancing and just making extra payments when you can.
Refinance into an Adjustable-Rate Mortgage
An adjustable-rate mortgage (ARM) is a loan that has a low initial interest rate for a period of years that will increase after the initial period is up.
The most common type is a 5/1 ARM, which will come with a low mortgage rate for the first 5 years of the loan and adjust each year afterwards.
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