When the pandemic hit, many homeowners found themselves struggling to make their mortgage payments. But despite the challenges of 2020 and 2021, the numbers have held steady and approximately 38% of those owners managed to pay off their mortgage, according to Census data.
With a constantly changing economy and fluctuating interest rates, you may want to consider fully achieving your dream of home ownership by paying off your mortgage early. For some people, outright owning your home after paying it off early is ideal. Others say it's better to live with certain appreciable debts, using available cash flow for other needs.
The experts are also divided. Here are your options if you decide to pay off your mortgage early.
What You Can Save
When you pay off your mortgage early, you can save a lot of money in the long run that would otherwise go towards interest, be free from monthly mortgage payments, and have peace of mind. In addition, paying off a mortgage early can make sense for people who already have an emergency fund (typically 3-6 months of household expenses in liquid cash).
“If your interest rate is on the higher side, you long to live a debt-free life, and you have other savings you can draw upon on a rainy day, then paying your mortgage off early might be the right choice,” says Shaun Connel, a real estate investor and owner of RentalPropertyCalculator.com.
Every time you make a mortgage payment, it’s split between the principal and interest. During the first several years, most costs will go to interest and fees, meaning you won’t see the difference for a long time. But, once you start getting past the interest, you will see the difference.
The longer you take to pay off your mortgage, the higher the interest will increase.
If you are concerned with receiving the highest ROI for your money, it is essential to have a reasonably low-interest rate. For example, if you don’t have an emergency fund, it might make sense to continue making your monthly mortgage payments. You can then use that money to build your savings or invest it in places where you can expect a higher return.
Is it Worth Paying Off Your Mortgage Early?
The sooner you pay off your mortgage, the less interest you will pay over the life of your projected amortization. Accelerating your mortgage repayment can be as simple as adjusting your payment frequency to accelerated weekly/biweekly payments from monthly or semi-monthly installments.
Because of how things are calculated, just splitting your monthly payment into two biweekly payments can shave months off your 30-year mortgage. And if you're paid every two weeks, it's often easier to budget this way as well.
Aside from this, though, most lenders offer a few other options to help save you interest in the long run on a closed fixed-rate mortgage. So while the percentages vary from lender to lender, some common trends exist.
Most lenders offer annual lump sum deposits, or “anniversary payments,” anywhere from 10-20% of the amount initially borrowed. This isn't always feasible, as a larger lump sum deposit can be complex for many households to accumulate.
If a lump sum is not at your disposal, you can start a small savings account, in which you can transfer a set amount every month, for example, and slowly build up to a more significant sum. Remember, it’s “up to” 10-20%, so even applying 2% annually will make a difference.
Is it Worth the Cost of Waiting?
While it's almost always a good idea to get out of debt, some debt can be healthy for you – and sometimes the price you'd pay to get rid of your mortgage is more expensive than holding on to it.
If your mortgage is locked in at a lower rate, it's often smarter to take what you cold use as extra towards the mortgage and invest it in stocks, mutual funds and government bonds that pay out a higher return.
Even in the short term this can be successful and add to your savings. There's nothing quite so disappointing as living in a paid off house, but unable to put food on the table, or having to turn around and take out a new mortgage at a much higher rate. So you have to weigh your options.
Some people also use a little extra cash flow to invest in additional properties. Multiple mortgages may sound like a nightmare to you, but for the savvy financier, they can mean passive income, increased savings and assets down the line that make retirement even more enticing.
Connel points out that there is often less incentive for people locked in a low-interest rate for a home in the last few years to pay off their mortgage early.
“However, as mortgage interest rates rise, the advantages of doing so start to become more compelling,” Connel said.
It all comes down to your circumstances and financial goals.
Options to Pay Off Your Mortgage Early
Many lenders offer a “double-up” payment. Provided you apply the same dollar amount on the same day as your planned mortgage payment, this second installment towards your balance would be considered a principal-only double-up payment.
Double-ups can accommodate double-ups in monthly, weekly, or biweekly installments. Still, they might be more manageable for homeowners to accomplish in smaller weekly/biweekly installments than attempting to double up a monthly figure.
“Many lenders offer the ability to increase your mortgage payment by 10-20% annually,” says Rasha Ingratta, a Mortgage Broker / Real Estate Investor. “While this seems pretty straightforward, it’s important to note that even rounding up your payment to the nearest dollar figure can have a small impact.”
What Your Savings Could Look Like
An example of what interest sayings could look like if you were to accelerate your mortgage payments and make one annual lump sum payment of $2,000:
If you have a $500,000 mortgage at an interest rate of 3% for a five-year fixed term, amortized over 25 years, your monthly payments will be $2,366.23. You will also be mortgage-free one year and 11 months sooner!
Instead, if you were to switch your payment frequency to accelerated bi-weekly and apply an annual lump-sum amount of $2,000.00, your bi-weekly payments would be $1,183.11, and you would save a total of $16,060.97 in interest over your term.
The above tactics are generally considered “natural repayment,” and you are not penalized for the payout of the mortgage itself. Still, you will, however, have a discharge fee to remove the lien from your home.
If you happen to have an open mortgage, you can apply for extra funds at any time without penalty. There would be legal fees associated with paying out and discharging the mortgage — the cost is set by each lender individually.
The Bottom Line
It all depends upon your circumstances as to whether or not you should pay off your mortgage early. Yes, paying your mortgage off early comes with benefits, but if you cannot afford the acceleration or lump sums, don’t stretch your budget. In addition, if you have any higher interest rate debts, such as credit cards, lines of credit, or overdraft protection, you are better to tend to these obligations before the mortgage balance.
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This post was produced and syndicated by Wealth of Geeks.
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