Click here to get this post in PDF
In today’s world, more and more people are choosing to pay off their mortgages faster. There are several reasons for this – some people want to get rid of debt as quickly as possible, while others like the peace of mind that comes with knowing they own their home outright. No matter your reason, you may wonder if paying off your mortgage early is worth it. This blog post will discuss the benefits of paying off your mortgage faster and ways to do it!
The Benefits of Paying Off Your Mortgage Faster
Save Money on Interest
The longer you have a mortgage, the more interest you’ll pay over the life of the loan. That’s because, with each passing year, there is less and less principal left to charge interest against. In other words, the bank has less of your money to earn interest on.
Paying off your mortgage early means paying less in total interest costs over the life of the loan. This could be a significant amount of money – tens of thousands or even hundreds of thousands – depending on the size and terms of your loan. On a 400k mortgage example you can save a lot of money.
Build Equity Quicker
Homeowners with a mortgage have what’s called “leverage.” This means they have borrowed money to purchase their home and only own a portion outright. Therefore, the sooner you can pay off your mortgage, the more equity you’ll build in your home.
As you make payments on your mortgage, a more significant portion of each payment will go toward the principal (the amount you borrowed) rather than interest (the fee charged for borrowing the money). In the early years of your mortgage, most of your payment goes toward interest. But as you continue paying down your loan, an increasingly larger portion of each payment is applied to the principal.
Paying off your mortgage early means that more of each payment is going toward your principal balance rather than being applied to interest. This builds equity in your home faster.
Own Your Home Outright
One of the most rewarding aspects of paying off your mortgage early is the satisfaction of owning your home outright. A sense of security and freedom comes with knowing you don’t have a monthly mortgage payment hanging over your head.
Plus, if you ever find yourself in a financial bind, you can continuously tap into the equity in your home by taking out a home equity loan or line of credit.
Get Peace of Mind
When you pay off your mortgage, you free up a large chunk of your monthly budget. This can give you peace of mind, knowing that you no longer have to worry about making such a hefty monthly payment. Additionally, you’ll no longer have to worry about the possibility of foreclosure if you can’t make your payments.
Paying off your mortgage also gives you more flexibility in your budget. For example, once your mortgage is paid off, you can use that money to save for retirement, take a much-needed vacation, or make home improvements.
Improve Your Credit Score
Paying off your mortgage early can also improve your credit score. This is because having a mortgage is considered “good debt” by the credit bureaus, so paying it off quickly shows that you can manage your debt responsibly. In addition, this can be helpful if you ever need to take out another loan, such as a car loan or a home equity loan, as you may qualify for a lower interest rate.
Save on Mortgage Insurance
If you have a conventional loan and put down less than 20% when purchasing your home, you must pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your loan. Paying off your mortgage early means cancelling your PMI sooner, saving you monthly money.
Make a Smart Investment
Investing in real estate has historically been a smart investment decision. Not only does homeownership allow you to build equity, but it can also appreciate over time. Paying off your mortgage early means that you are building equity in your home faster and making a wise investment.
How to Pay Off Your Mortgage Faster
Now that we’ve discussed some benefits of paying off your mortgage early, let’s discuss how you can do it. Below are a few methods you can use to make extra payments on your mortgage and get rid of debt quicker:
Make Biweekly Payments
If you have the cash flow to make biweekly payments, it’s a great way to get ahead on your mortgage. By making half-payments every two weeks, you’ll make 26 half-payments each year, or the equivalent of 13 full monthly payments. That extra payment can knock eight years off a 30-year mortgage, according to Chase.com.
Just be sure that your lender applies for the payment correctly, as some lenders will hold onto the money until it adds up to an extra monthly fee and then apply it to your principal balance. You want the payment applied immediately so you gain interest savings right away. Also, check with your lender to make sure there are no prepayment penalties for making biweekly payments.
Round Up Your Payments
Another way to pay your mortgage faster is to “round up” your payments. For example, if your monthly mortgage payment is ￡500, you could round up to ￡600 each month. The extra ￡100 would go toward your principal, and you’d pay off your mortgage faster.
Again, be sure that your lender applies the additional funds correctly. Some lenders will hold onto the money until it adds up to an extra monthly payment and then apply it to your principal balance. You want the payment applied immediately so you gain interest savings right away. Also, check with your lender to ensure there are no prepayment penalties for larger payments.
Make a Lump-Sum Payment
If you come into some extra cash – say, from a bonus at work or a tax refund – you could put it toward your mortgage principal to pay off your loan even faster. Even an extra ￡100 applied to your mortgage can help shorten the length of your loan and save you money in interest over time.
Refinance To A Shorter Term
If you have been making payments on your mortgage for a few years, you may have the opportunity to refinance to a shorter term. For example, if you have a 30-year mortgage, you could refinance to a 15- or 20-year mortgage. Of course, this would increase your monthly payments, but it would also help you pay off your mortgage quicker and save on interest.
Make Regular Overpayments
You can make regular overpayments on your mortgage if you have extra monthly cash. This will help reduce the interest you pay and means you’ll pay off your mortgage sooner.
You can make overpayments of up to 10% of your mortgage balance each year without incurring any penalties. So, if you have a £150,000 mortgage, you could overpay up to £15,000 in a year without being charged.
If you want to make even larger overpayments, most lenders will let you do this but will charge a penalty. The size of the penalty varies from lender to lender but is typically around 1-5% of the amount being repaid early.
The Bottom Line
Paying your mortgage early can be a great way to save money on interest and become debt-free sooner. There are a few different ways to do it, so consider which method makes the most sense. And as always, check with your lender before making any extra payments or changes to your loan.
You may also like: How to pay off your mortgage faster – by using your pension!