Paying off your mortgage early may end up saving you thousands of dollars. However, before you consider doing this, there are a few other things to review. We will review why you should pay off your mortgage early, when to pay it off early, and when it is best to avoid it.
Why you should consider paying off your mortgage early.
Your monthly mortgage payment is split between principal and interest. The principal you pay is the amount that goes directly to paying for the home. You pay interest because you borrowed funds from the lender. Therefore, when you pay your mortgage payment, the full amount does not go directly to repaying your loan. In fact, in the beginning stages of the loan, the majority of what you pay is interest. To understand this better, read this blog about amortization on your loan.
You can apply extra payments on top of your consistent mortgage payment each month. Any additional payment goes directly to the principal balance of your mortgage. These additional payments reduce the amount of money you pay on interest, and can subtract years from your mortgage term. In the end, this could be a very smart financial decision.
*Amount of savings is dependent on your individual loan interest and principal balance. Some loan types are subject to early payment penalties. Reach out to your mortgage provider to find out if early payments are a good fit for you.
When to pay your mortgage off early.
If you already have enough money to pay off your mortgage payment and any other expenses, it may be smart to consider contributing some extra payments to your mortgage. The more you put towards the additional payment, the quicker you will pay off the loan, save money on interest, and shorten the loan term. Keep in mind, an extra payment doesn’t have to be a large amount. For example, even contributing $40 extra a month will draw in some major savings. Don’t assume a crazy amount extra is necessary to contribute. All in all, make sure you have a good 6 months’ worth of liquid savings on hand, and are comfortable paying off other expenses before considering paying more towards your mortgage.
When to avoid paying off your mortgage early.
If you have additional debt to repay, it may be best to skip paying off your mortgage early. Many times, student loans, credit card debt, etc. have higher interest rates than mortgage loans. This means that you should focus on paying those down before you consider paying more on your mortgage. Paying your mortgage off early, especially if you have other debt to worry about, could be more costly in the long run. Examine your financial statements and budget to determine what is right for you.
Another case when you should avoid paying off your mortgage early is if your lender has a prepayment penalty. A prepayment penalty is a fee the borrower must pay IF the borrower pays extra on their mortgage. These penalties typically expire after the first few years of the loan. However, consider this when making your financial decision.
Making Your Decision
All in all, paying off your mortgage early has some serious savings. However, it is crucial to make sure you are in an optimal financial situation to do so. Contact us to connect with a mortgage professional today!