Does It Make Sense To Pay Off a Home Loan Early?

W.What do Starbucks, bottled water and an extra pack of cigarettes have in common? They are common daily expenses made by people and are often used as examples of money that could be saved and used to pay off a mortgage sooner.

So instead of paying $ 4 a day or $ 120 a month for coffee or fancy water, send the money to the company servicing your loan to reduce the principal. There are other ways to repay a home loan, but before we discuss some of the mortgage prepayment methods, there are important considerations for borrowers to think about.

To cash out or not to cash out?

Why would you want to repay your mortgage? If you’ve financed a new home or refinanced your home in the past six months, you may have one of the lowest interest rates in history. Any 30 year fixed rate mortgage under 3 percent or a 15 year fixed rate mortgage under 2.50 percent is excellent. Home loan interest rates actually rose in 2021, so we can look back with envy at those low interest rates for the years to come.

Are you ready to pay that off? That is, paying off a debt that is being financed at an incredibly low interest rate? Regardless of your propensity to repay or not pay off, there are a few questions that need to be answered before you can gradually or quickly repay your home loan.

Do you still have money for emergencies or for potentially large expenses in the future? Few foresee a storm that will devastate their home and require costly repairs or a large medical bill that is not covered by insurance. If you have college tied kids, do you have these expenses planned? A survey conducted by US News shows that the average cost of tuition and tuition at a private college is $ 35,087. A school like Stanford costs more than $ 53,000 or more than $ 200,000 for four years. And that doesn’t include a room, food, and books! Did you start putting that money aside?

How do you feel about saving for retirement? A retirement plan that is fully funded offers a wonderful sense of security and the effort to repay a home in a short amount of time may not be worth the emotional or financial impact. And the return on your retirement savings could be higher than the interest rate on your mortgage.

Do you have other debts? Typically, credit cards, student loans, or car loans have a higher interest rate and are not tax deductible. Talk to your accountant, but it usually makes more sense to pay off this type of debt than or at least before paying off a home loan.

Moving forward strategically

With that in mind, you may have decided that paying off your mortgage is still something you would love to do. When you’re ready to move forward, here are some easy ways to get your mortgage paid back early and save money.

Some borrowers may get a head start by stretching earlier, maximizing their down payment (potentially eliminating the cost of mortgage insurance), or buying a smaller home to lower costs, and therefore monthly principal and interest payments. Or they have already refinanced themselves into a shorter term loan, increasing payments but decreasing the remaining time on their mortgage.

Strictly speaking, refinancing your mortgage doesn’t pay off early – it replaces one debt with another. But there are advantages. Refinancing your mortgage can help save thousands in interest and even shorten your repayment period. If you refinance a 30 year mortgage with a 15 year fixed rate home loan or a “medium term adjustable rate mortgage (fixed or 3 or 5 or 7 years and adjusted after) your monthly payment may increase, but you will be able to be able to pay for your home in less time. And if you refinance from an existing 30 year loan to a new 30 year mortgage but set a lower interest rate, more of your payment can go to the lender instead of interest.

Some borrowers switch to bi-weekly payments and make a mortgage payment to the company, which services their loan twice a month instead of once a month. This often appeals to families who are paid twice a month. For example, on a 30-year 3.00 percent mortgage of $ 300,000 over 30 years, the borrower pays $ 155,332 in interest on a monthly payment of $ 1,264.81. However, if you pay half of it every two weeks ($ 632.41 twenty-six times a year), the total interest paid drops to $ 134,541, or a saving of $ 20,791.

Of course there are variations of this. Some borrowers who, on average, spend less than their mortgage payment each month, may make an additional payment quarterly or once a year. Or, a couple abandons the habit of drinking $ 8 a day of coffee and chooses to make coffee at home with significant savings, paying their principal by $ 240 a month. Still others look at their monthly mortgage statement, which shows the principal (relative to the interest), take that principal, and consistently add it to the next month’s payment.

The best individual choice

Psychologically or financially, direct ownership of your home can have peace of mind knowing that you have no monthly payments and that no one can take your home away from you. “Slowly and surely the race is winning,” as they say, and a disciplined and consistent approach to gradually repaying a home loan can have tremendous benefits.

Which payout or withdrawal strategy is best for you?

The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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