When the pandemic hit, many homeowners struggled to make their mortgage payments. But despite the challenges in 2020 and 2021, the numbers have held steady, and about 38% of those homeowners have managed to pay off their mortgage, according to census data.
With an ever-changing economy and fluctuating interest rates, you might want to consider fully realizing your dream of home ownership by paying off your mortgage sooner. For some people, owning their home after paying it off early is ideal. Others say it’s better to live with some sizeable debt, using available cash for other needs.
The experts are also divided. Here are your options if you decide to pay off your mortgage early.
What you can save
When you pay off your mortgage early, you can save a lot of money in the long term that would otherwise be used to pay interest, be freed from monthly mortgage payments and have peace of mind. Additionally, paying off a mortgage early can be a good idea for people who already have an emergency fund (usually 3-6 months of household cash outlays).
“If your interest rate is higher, you aspire to live a debt-free life, and you have other savings to draw on on a rainy day, then paying off your mortgage early might be the right choice. “, says Shaun. Connel, real estate investor and owner of RentalPropertyCalculator.com.
Each time you make a mortgage payment, it is split between principal and interest. In the first few years, most of the costs will go to interest and fees, which means you won’t see the difference for a long time. But, once you start moving past the interest, you’ll see the difference.
The longer you delay paying off your mortgage, the more interest will increase.
If you want to get the highest return on investment for your money, having a reasonably low interest rate is essential. For example, if you don’t have an emergency fund, it might be a good idea to keep making your monthly mortgage payments. You can then use this money to build up your savings or invest it in places where you can expect a higher return.
Is it worth paying off your mortgage early?
The sooner you pay off your mortgage, the less interest you’ll pay over the life of your projected amortization. Accelerating your mortgage payoff can be as simple as adjusting your payment frequency to accelerate weekly/bi-weekly payments from monthly or semi-monthly installments.
Because of the way things are calculated, simply splitting your monthly payment into two installments every two weeks can take months off your 30-year mortgage. And if you get paid biweekly, it’s often easier to budget that way too.
Other than that, however, most lenders offer a few other options to help you save long-term interest on a closed, fixed-rate mortgage. So while the percentages vary from lender to lender, some common trends exist.
Most lenders offer annual lump sum deposits, or “anniversary payments,” ranging from 10 to 20 percent of the amount originally borrowed. This is not always possible, as a larger lump sum deposit can be complex for many households to accumulate.
If a lump sum is not available to you, you can open a small savings account, into which you can transfer a fixed amount every month, for example, and slowly build up to a larger sum. Remember, this is “up to” 10-20%, so even applying 2% per year will make a difference.
Is it worth the wait?
While it’s almost always a good idea to get out of debt, some debt can be healthy for you — and sometimes the price you’d pay to get rid of your mortgage is more expensive than keeping it.
If your mortgage is locked in at a lower rate, it often makes more sense to take what you’re cold using as a mortgage supplement and invest it in stocks, mutual funds and government bonds that yield a higher yield.
Even in the short term, this can be successful and increase your savings. There’s nothing more disappointing than living in a house that’s paid for but unable to put food on the table, or having to turn around and take out a new mortgage at a much higher rate. So you have to weigh your options.
Some people also use some extra cash to invest in additional properties. Multiple mortgages may seem like a nightmare to you, but for the savvy financier they can mean passive income, increased savings and assets that make retirement even more attractive.
Connel points out that there’s often less incentive for people stuck in a low home interest rate for the past few years to pay off their mortgage sooner.
“However, as mortgage interest rates rise, the benefits of doing so start to become more compelling,” Connel said.
It all depends on your situation and your financial goals.
Options to pay off your mortgage sooner
Many lenders offer a “double” payment. Provided you apply the same dollar amount on the same day as your scheduled mortgage payment, this second payment towards your balance would be considered a double principal payment only.
Doubles can accommodate double monthly, weekly or bi-weekly installments. Still, they might be more manageable for owners to accomplish in small weekly/bi-weekly installments than trying to double a monthly figure.
“Many lenders offer the option of increasing your mortgage payment by 10-20% per year,” says Rasha Ingratta, Mortgage Broker/Real Estate Investor. “While this sounds simple enough, it’s important to note that even rounding your payment to the nearest dollar can have a small impact.”
What your savings might look like
An example of what interest rates might look like if you were to accelerate your mortgage payments and make an annual lump sum payment of $2,000:
If you have a $500,000 mortgage at 3% interest for a fixed term of five years, amortized over 25 years, your monthly payments will be $2,366.23. You will also be mortgage free one year and 11 months earlier!
Instead, if you were to change your payment frequency to accelerated two weeks and apply an annual lump sum of $2,000.00, your bi-weekly payments would be $1,183.11 and you would save a total of $16,060.97 in interest on your term.
The above tactics are generally considered a “natural repayment” and you are not penalized for the repayment of the mortgage itself. Yet, you will however have a discharge fee to remove the lien from your home.
If you happen to have an open mortgage, you can request additional funds at any time without penalty. There would be legal fees associated with the repayment and discharge of the mortgage – the cost is set by each lender individually.
Whether or not you should prepay your mortgage depends on your situation. Yes, there are benefits to paying off your mortgage early, but if you can’t afford the acceleration or lump sum payments, don’t stretch your budget. Also, if you have higher interest debt, such as credit cards, lines of credit, or overdraft protection, it’s best to take care of those obligations before the mortgage balance. .