Buying a new home is exciting. But the repayment of this loan can get very old very quickly, especially since it can take decades to repay. That can be depressing for first-time home buyers who are likely to face multiple financial challenges – car loans, school loans, credit cards, and lower entry-level salaries at the start of their careers. Fortunately, you probably still have plenty of time to earn and invest.
Still, it is difficult to see how most of your scheduled payments will be used to cover interest, and very little will be used to reduce the principal in the early years of your mortgage.
With so many other bills to be paid, many borrowers lack the motivation to expedite mortgage payments. It is usually at the end of the life of a loan when homeowners are more willing to step up the pace to shorten the time to mortgage-free.
This blog examines whether there is any real benefit in scooping out a mortgage for the life of the loan and shows you some of the ways you can do so.
Ask yourself these 6 questions
The pros and cons of prepaying a mortgage depend on what is important now – and what will be important in the future. If you are thinking of paying off your mortgage earlier than planned, there are six questions to ask yourself:
What if you have an emergency? Before you decide to pay off your mortgage a little earlier, think about a worst-case scenario. What if you need extra cash to replace your roof or fix an outdated HVAC system. If you don't have cash to tap, an emergency cushion so to speak, you can borrow emergency cash at a higher rate than what you pay for your home loan.
Are you planning for retirement? Even if you are relatively new to your career, maximizing your retirement savings should be your top priority, especially if your employer pays all or part of your contributions. This could be a smarter move than investing a little more in your mortgage. As always, you should meet with a financial planner to discuss the investment options that are most suitable for you.
Have children? How is your education doing? The tuition fees are not getting any cheaper. And the daycare center is already obscenely expensive. If you have children – or plan to have a family – you should consider putting money in a mutual fund or other investment that is protected from state and local taxes.
How are you going to pay off other debts? Before you decide to increase your monthly mortgage bill, focus on paying off other obligations and try not to take on any new debt. Given how quickly interest and additional fees can skyrocket credit card bills, it might make more sense to pay off your credit card before adding extra $$ to the mortgage. In January 2021, the average credit card interest rate was 17.9%. This is much higher than the typical mortgage rate over the past few years.
What about taxes? Paying off your mortgage early can be a boon to your savings, but you will lose any tax deductions you might get on mortgage interest. Ask your tax advisor about any tax implications that may arise after you repay your mortgage.
Do the terms of your mortgage allow prepayment? Before attempting to pay off your mortgage early, be sure to review your original loan records. Some lenders only accept additional payments at certain intervals, while others may charge early repayment penalties. This could prevent you from moving forward before you even get started.
How to pay off a mortgage early
If, after answering the above questions, you decide that prepaying your mortgage is the right move for you, there are several ways you can do it. Here are some examples of how you can get early mortgage repayment.
MAKE A 13TH PAYMENT EVERY YEAR
If you make an extra payment each year, a 30 year loan will cut it down to 25 years and 11 months, saving you four years in principal and interest payments. Simply divide your monthly mortgage amount by 12 and add that amount to each monthly payment. So if you pay $ 1,350 a month, add $ 112.50 (1,350 divided by 12) for a total of $ 1,462.50. Either that or an additional mortgage payment of $ 1,350 once a year to have the same effect on your repayment schedule.
Make sure your lender knows that you want this additional payment to be on the principal, not the interest, and check the next month's loan statement to confirm it went as intended.
ROUND UP EVERY MONTH
If an extra monthly payment throws your budget off balance each year, try rounding up. For example, take this $ 1350 monthly payment and round up to $ 1400. The extra $ 50 isn't much, but it will still cut the payback plan by a year or two.
INSERT A PAYMENT PUMP
Let's say you got a bonus at work or a sweet refund on your taxes. When you put some of this on your mortgage, it does the same thing: it shortens the life of your loan and lowers the amount of interest you pay. Do this several times during the life of the loan and you will own your home even faster.
BAKE IT IN
Some lenders allow you to set your payment above the minimum required from the start. Let's take the example above and use this hypothetical mortgage payment of $ 1,350. Ask your lender to provide you with mortgage bills for $ 1,400, which you will automatically round up. The good thing is that you will get used to this larger mortgage amount pretty quickly. But be careful: once the overpayment is included in your mortgage contract, it is not easy to reverse. So make sure you can live with it for the life of your loan.
REDUCED TIME REFINANCING
Refinancing is only an option if it makes financial sense, and you should speak to your loan officer to work out the numbers. Sure, you can refinance a 30-year fixed-rate mortgage into a 15-year loan, but the interest rate has to work in your favor. You can pay off that mortgage years earlier and save a shipload of avoided interest payments, but you have to take into account that you will end up paying additional closing costs.
In addition, refinancing is less flexible than paying additional payments. Once you have refinanced, you need to set a fixed payment again for the life of the loan.
There is a lot to consider
The first time you buy a home, your mortgage repayment seems to be a lifetime. However, if you start early in the life of your mortgage, or better yet, before you buy it, a small extra upfront payment can get you mortgage-free sooner than you thought.
It's a big decision – one that could give you more freedom along the way, but it limits your financial flexibility along the way. Speak to a Movement Mortgage loan officer near you to review your goals, calculate your potential savings, and determine if early mortgage repayment makes sense for you.