A mortgage is the most straightforward and practical means of owning a property. But there is no hard and fast rule that you have to be burdened with your mortgage for the full term. You can pay off your mortgage earlier and reap the benefits.
Benefits Of Early Mortgage Repayment
The total interest amount that you pay during the term of your mortgage is enormous. You end up paying this amount because you don’t have enough money to buy a property outright. But as the years go by, you can pay more due to an improved financial status.
Paying down the mortgage early is an effective strategy that gives you peace of mind. By clearing those dues, you can proudly call yourself a homeowner. Plus, you’d be investing in a tangible asset that can secure your family’s future.
By repaying your mortgage early, you can:
- Use the extra cash for putting towards other life goals.
- Save considerable amounts you would have paid in interest over the years.
- Put the extra spare cash towards a second property.
- Divert the money you save towards your retirement fund.
Pay Off Your Mortgage Early And Become More Financially Secure
Follow these five tips to pay off your mortgage early and save some of your hard-earned money:
1. Reduce Your Expenses
Make a note of your expenses for at least one month and crunch the numbers. Once you see where your money is going, you can identify where you can cut down, like eating out only once a month.
You can also get help paying bills by collecting household items that you don’t use and sell them online. Alternatively, you could hold garage sales and sell your stuff. The money you earn will help you with your bills and save money for your mortgage.
2. Plan For Scheduled Extra Payments
You can arrange with your lender to set up scheduled extra payments every year. It can take one or more payments, over and above your regular mortgage payments. You can set up this additional payment as a standing order with your bank.
However, when you put in this request, make sure that the extra payments will go towards the principal and not your interest.
There are numerous opportunities every year to put additional money into extra scheduled payments. A few examples are your annual bonus, salary increments, income tax refunds, or maturation of investments like mutual funds.
3. Set Up Bi-Weekly Payments
With a bi-weekly mortgage, you pay your mortgage instalment twice a month instead of monthly. You can do this from the very beginning of your mortgage term, or you can convert monthly payments into bi-weekly any time during the term.
All lenders do not offer the facility of bi-weekly payments. Hence, you would do well to check with your lender whether they provide it or not. Even if you started with monthly payments and then switched to bi-weekly, you’ll soon get used to it.
4. Shorten Your Mortgage Term
Another way of paying off your home quickly is by shortening the term, also known as refinancing your mortgage loan. You can do this by shortening the loan with increased monthly payments or get the interest rate lowered.
Before you go in for the decision to refinance, get a confirmation from your lender regarding hefty closing costs. Closing costs can amount to 2% to 3% of the total loan amount.
Hence, sometimes only paying extra may be a better option. Moreover, you need to be wary of lenders who declare that they charge “no closing costs.” In such a case, read the fine print, and you will find hidden costs somewhere.
5. Recasting Your Mortgage
Recasting is not as popular as refinancing, but it can work for you if you want to pay your mortgage off early. Here’s how it works:
You make a sizeable lump sum payment towards your mortgage. Your lender will then “recast” the mortgage. It means that you will now get a lower balance amount and lower monthly payment.
There is usually a fee for recasting, but it is a nominal amount. However, do be aware that all types of mortgages may not qualify for recasting.
Factors To Consider Before Paying Your Mortgage Early
Although paying off a home early is useful, it has a few drawbacks, depending on your financial situation. If your income isn’t sufficient to pay the mortgage and support your lifestyle, it may be less advantageous to tie your money into a home.
By paying off a mortgage early, you essentially invest a big chunk of your wealth into a home, thus risking the liquidity of all your other assets. You may struggle for funds in the event of a medical problem, unemployment, and other emergencies.
Moreover, a home is not a zero-risk asset and can depreciate over time due to several reasons – be it maintenance problems, natural disasters, or a volatile market. In essence, those extra payments towards your mortgage are not without risk.
Plus, investing in stocks may be a better use of your wealth than dedicating it to clearing your monthly mortgage payments, especially with low mortgage interest rates. However, you need to learn how the market works before trying this option to grow your money.
Don’t Let Your Mortgage Tie You Down
There is so much more you can do with your money. Having a mortgage to pay every month can be restricting, even if you try to curb your debt with the best low-interest credit cards.
Sure, when you applied for the mortgage, you had limited access to cash. But over the years, your financial status is likely to improve. If you have better repayment means when you are a bit older, you can use it to your advantage.
While paying off a home early has many benefits, it is not recommended to draw money from your retirement savings or rainy day fund to make these payments.
Paying off your mortgage early can lift a huge financial burden off your shoulders. With these simple tips and considerations, you can do it and lead a better life.
Raj Kumar is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance clap.