The advantages of mortgage repayment
You have taken the plunge and decided to buy a house. After signing a mountain of paperwork, you are now the proud owner of your own residence. Thirty days later, when the first mortgage payment comes due, you are struck by the reality of what you have done. You have assumed 30 years of massive payments, in an economy that makes no promise of long-term job stability. Do not panic.
In this article, we’ll take a look at the benefits of paying off your mortgage as early as possible and give you some tips on how to do it.
Paying off your mortgage sooner: the pros and cons
The first and most obvious reason to pay off your mortgage early is that it will save you tens of thousands of dollars. Read the papers you signed when purchasing the place and take a close look at your amortization schedule. Mortgage companies disclose upfront that you’ll pay more than double the purchase price of the home before you actually own it.
The second reason is the peace of mind you gain from owning your home. With monthly cash spending declining, the prospect of unemployment or underemployment is no longer so daunting. You can now afford to take a job that pays significantly less than your previous position, without worrying about losing your home.
However, many people argue that paying off your mortgage is a bad financial decision. They claim that you will get a higher return, in the long run, if you invest your money, instead of making additional mortgage payments. While there is a chance that you will achieve such a feat, there is also a chance that you will not. Given the choice between a guaranteed savings of 6% interest on their mortgage (compounded over 30 years), or the option of getting another rate of return, which may be higher or lower, conservative investors will value safe.
Of course, the whole argument is moot when you really look at the facts of the situation. Most people buy a house to have a place to live. Even if its value doubles or triples, they are not going to sell it, and if they do, it will take every penny they earn to buy a comparable house in the same neighborhood. Also, because you can’t live in a mutual fund, most home buyers don’t buy in order to beat the performance of the S&P 500.
The next argument against paying off your mortgage is even more dubious, but you hear it all the time, even from sophisticated investors: mortgage interest will give you tax relief. While this is technically true and you spend $ 1 on interest to get a 25 or 35 cent tax break, it only works if you a) itemize the deductions and b) are in the higher tax brackets.For the average person, this is not a good return on their investment.
Paying off your mortgage offers a much more reliable return on your investment than anything the stock market can offer. It also saves you tens or even hundreds of thousands of dollars. To top it off, it offers the security of having affordable housing should your income drop. With all of these benefits in mind, it’s time to consider the strategies that will help you pay off that mortgage.
Plan before you buy
Look before you start and do the math ahead of time to determine how much home you can afford to buy. So buy less home than you can afford. This strategy will ensure that you have enough cash on hand to make additional mortgage payments and provide you with some cushion if you were to be in a lower paying job at some point in the future. Also, make sure your mortgage doesn’t charge a prepayment penalty. This clause can slow down your efforts to get out of debt.
Then you need to pay attention to the financing conditions. Although variable rate mortgages (ARMs) offer lower upfront payments, they are too often used to give buyers access to homes they really cannot afford. When interest rates rise, some homeowners are caught off guard. Likewise, homebuyers often plan their finances with the understanding that their mortgage payments won’t change; they find that is not always true when their local government increases property taxes. If your plan is to get out of debt as quickly as possible, a fixed rate mortgage offers the predictability of a stable interest rate, and it can still be refinanced if rates drop.
How to pay off a mortgage quickly
Once you have a mortgage, the key to paying it off is simple: send money. Some mortgage plans offer a bi-monthly payment schedule, which results in one additional payment per year. This is a great strategy, unless there is a cost associated with it. If so, just put some money aside and make an additional payment yourself.
If your career progresses over the years, put those increases and bonuses to good use by sending them to the mortgage company. You do very well without this money, and you won’t miss it if you don’t get used to having it in your budget.
Keep an eye on interest rates and, if they come down, consider refinancing. If you can lower your interest rate, shorten your loan term, or both, refinancing can be a great strategy. Don’t make the mistake of keeping your mandate the same and withdrawing money.
Using a mortgage calculator is a good resource to compare these costs.
The bottom line
There’s no better time than the present to begin your quest to pay off that mortgage. Start by reading your amortization schedule; Once you see exactly how much of your monthly payment is going towards interest and how much is going towards principal repayment, you will find that each additional dollar you send reduces the part of your payment that covers your expenses. interest. This can be a powerful motivator for financially savvy people.
If you focus your efforts on the task at hand, you might be surprised at how quickly you can take out a mortgage. Once your mission is accomplished, you will find that the comforts of home are even more enjoyable when it is you, not the bank, who own the home.