Saturday, February 20, 2021

Should you pay your mortgage early?

Buying a home is one of life’s major decisions and it might be the largest purchase you’d ever make which is why most people arrange a mortgage to buy such. Mortgage is simply a loan taken out to buy property or land and most run for up to 30 years. This loan is likely to be the biggest, lengthiest investment and is only secured when it is paid off. If you can’t keep up your repayments the lender can repossess or buy back your home and sell it so they get their money back.

It’s daunting thinking of a mortgage hanging over your head for decades and it’s natural that we want to pay the mortgage off as soon as possible. Mortgage is a huge debt and it is practical that we think of paying it earlier than what is stated in the contract. It gives us the peace of mind being debt-free at last and freeing up cash flow for other opportunities

Can you pay off your mortgage early?
Paying off your mortgage early still depends on your current financial situation. If you think you’re ready paying off your mortgage early, contact your mortgage lender first. It might save you from a big amount of interest but it might be subject to a prepayment penalty, based on the terms of your loan. Still, the penalty will surely not outweigh the benefits of eliminating the biggest bill of your lifetime.

Pay off the mortgage or invest?
Paying off the mortgage early means a lot of money, and if you are a risk-taker and you are brave enough for a new venture, you might think first of investment. Looking at history, mortgage rates are at all-time lows, so if paying off your mortgage early leads to a return equal to your interest rate; it might be better to look at investment where the money will grow and earn big time, that paying your mortgage on a monthly basis longer will never feel like a responsibility anymore. However, any choice is a risk. Carefully consider which risks you’re willing to take.

Do you value peace of mind?
Sometimes, we just have to care less about the bottom line and more about peace of mind. Owning a home free and clear provides benefits that can’t be measured in strictly financial terms. For a lot of people especially those living on a fixed income, eliminating a monthly mortgage payment ahead of retirement can provide mental relief. Having it paid off before retirement might not always make financial sense, but it always feels good. Eliminating one big financial responsibility offers peace of mind and it allows for better budgeting.

Want to pay off your mortgage early?
Here's a tool to help you decide. This online mortgage calculator will show you a realistic scenario when you want to shorten your loan term. It estimates the loan payment for a mortgage inclusive of property taxes, homeowners insurance, PMI & HOA fees. You just have to change any input based on your current loan terms and contract and the results will be automatically calculated. You can also create a printable amortization schedule which can be your reference even if you are offline.

You can use this calculator to make a comparison of the interest that will be accumulated based on your loan term. Say you chose to pay your mortgage in 30 years, for a home worth USD500,000 and you put in 20% down payment, with an interest of 4%. After providing the figures in the ownership expenses, you will see that your accumulated interest for 30 years is USD287,478. If you lowered down your terms to 10 years, your interest will be decreased to US$85,976. There is really a huge difference when you pay off the mortgage early, based on the results from the calculator.

If you will notice, the result will show that your monthly payment increases as you shorten the term, but the security and being free from financial obligations is always priceless. Again, if you are financially capable of paying for higher monthly amortizations, then why not? Paying off the mortgage early is one big leap towards your goals for retirement.

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