Tag: Mortgage

The fact if you should pay off your  mortgage early or not depends  your unique situation and financial goals which will lead you to the best financial decision for you. 

And because of this there are some questions why need to ask yourself to go to the best financial decision. 

The first question you gotta ask yourself is “Do you have an emergency fund?”. If your saving account cant absorb at least three months’ worth of living expenses than maybe consider first saving up an emergency fund before paying off your mortgage early.

The second thing is the question of “How long do you plan to stay in your home?”. Here you need to think if there is a chance you will be living in the home for years and years or if you will be selling it within a couple years. 

If you will be selling the house within a couple years then the benefits of refinancing or paying down your mortgage will be less likely to pay off. My advice here will be to invest the money somewhere else in stocks, funds, bonds etc.

The third question you should ask yourself is “What mortgage interest rate would you qualify for?”. Now on days the average mortgage rates  are very low, historically low I might even say. The average is 15-year loans. 

Your rate depends all on your credit score, debt-to-income ratio, and other personal finances.

The last question here is “How much extra money do you have to work with?” together with “Do you have enough flexibility to pay down the mortgage and work toward other financial goals simultaneously?”. 

And these two questions together pretty much speaks for themselves. 

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There are many thing to consider before you actually pay off your mortgage early. So that’s why this article exist.

There are main 4 topic to thing about before you pay off your mortgage early. 

The first thing to thing about is the real estate market. And this is about he real estate market which might dip when you are considering to sell. Which will make it harder to receive the price which you had hoped for.

The second thing is about using all your extra cash to pay down your mortgage which might be tied up too much of your net worth at your place. And this sort of makes it harder to access it later. And thats why you need  a cash-out refinance or a second mortgage to sort of generate cash flow from your home investment.

The third thing is that you might miss out on  higher returns from investments whose rates of return could possible exceed the amount of interest you’re paying on the mortgage. Keep in mind that the stocks doesn’t always go up. 

You could potentially avoid very big losses by applying extra funds toward your mortgage. 

The last thing is about IRA. The money you put in the  deposit into an IRA instead of paying down your mortgage can grow tax-free. Focusing simply on the  building a healthy retirement fund when you’re younger gives your savings more time to grow. But also you can deduct contributions to your traditional IRA up to the IRS’s annual limits

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There are a lots of financial experts who are encourage homeowners to put their extra money into specific retirement accounts instead of paying off the mortgage loan early. And if financial experts is saying this then there must be something to it.

I look why so many financial experts are saying this. And you know what the reason is? 

The grand reason behind this is that for almost 100 years the stock market itself has earned an annual rate of return which is on the 10% average. And this whole thing thing means that homeowners could very possibly earn more by investing in the stock market than from paying down the mortgage balance.

Keep in mind that there are some homeowners which are rite off their mortgage interest payments as a tax deduction which means they could get some of that money back at tax time.

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There are a lots of ways on how you can shorten your loan period and with the same save a lots of cash in interest on your mortgage. Today we will cover one strategy you can use and in the future there will come more strategies.

Step 1) Refinance to a shorter term

As I mentioned in the previous article about mortgage the most popular home loan is the 30-year-loan. 

The shorter repayment periods of course means higher monthly payments however you will have less interest over the life of the loan.

Step 2) Make extra principal payments

Another step here is to ay off your home loan faster is to simply pay extra whenever you are able to do so.

Most mortgage loans which are issued after January, 10th 2014 doesn’t charge prepayment penalties. Which means that you can pay more money toward your mortgage balance each month without any penalty or extra fees for it

Step 3) Make one extra mortgage payment per year

This on is all about making your  mortgage payment every other week instead of paying the full amount once a month. 

This step is also known as “bi-weekly payments.” When you use the “bi-weekly payments instead of monthly payments you sort of end up adding one extra payment each year.

Step 4) Recast your mortgage instead of refinancing

Keep in mind that mortgage recasting is very different from refinancing and this is because you get to keep your existing loan.

Here in this step you simple just pay a lump sum toward the principal. And the bank here will adjust your payoff schedule to reflect the new balance. And the result of this step will be a shorter loan term.

The biggest benefit why you should do this step is to recasting is that the fees are significantly lower than refinancing.

Step 5) Reduce your balance with a lump-sum payment

This step is sort of an alternative to recasting is to make lump-sum payments to your principal whenever you can.

Inherited money? Bonus at job? or whatever use it on the lump sum payment.

Since both the VA and the FHA loans cant be recasted, the lump-sum payments might be the next best thing.

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When you look at the stats on the internet about how long homeowners stay in their homes you will see that the average is 13 years and on average people take a 30-year loan (Link to the stat I used).

30-year loan and 13 years of staying at the same house on average means that loans might have shorter lifespan with some people. And the sooner you pay off the loan the better for you. Because if you took a 30-year loan and you want to move out of your house after 15 years or so for what ever reason and you want to buy a new place. It means that either you have to wait another 15 years until you pay off the debt or you need to take another loan and have two loans. 

If you take a 30-year loan and you want to move out before the 30-year loan is over you have 3 options here as mentioned before

1. Wait until you pay off the 30-year loan
2. Take another loan and have two loans 
3. Pay off the moorage early on

And to be honest the third option looks the best out of all three options. But it also all up to you and what option you feel comfortable with. 

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