Pre-paying your mortgage is a great idea:
Because of the amortization schedule, you’ll save the most money by making extra payments at the beginning of your loan.
The longer your mortgage, the more interest you’ll pay on it. For example, if you take out a 30-year mortgage for $200,000 at 5% interest and pay an extra $200 per month (in addition to your regular payment), you’ll end up paying about $86,000 in extra interest over 30 years. If instead you paid an extra $200 per month for only ten years before reverting to your standard payment amount, you’d only pay about $28,000 in extra interest over that time. Pre-paying early can be advantageous because:
- You will pay less overall – this is due to something called amortization. Amortization is what causes most of your monthly mortgage payment to go towards paying down the principal—rather than just covering the interest costs—at first. Due to this effect, if you make extra payments while they’re still being applied largely towards principal at the beginning of your loan, those additional payments will have a greater impact on reducing what’s owed on your home than they would later in the life of a loan.
There are more benefits to pre-paying your mortgage than just reducing your interest payments.
There’s one big benefit that often goes ignored: You could save money on interest payments. Here are some other benefits to paying off your mortgage early:
- Smarter spending and saving. When you have a mortgage, you might be tempted to spend the extra cash that you would have used toward your mortgage payment. With your house already paid off, you don’t have this temptation and can use the extra cash for things like retirement savings or other investments.
- Improve credit score. Your credit utilization ratio—the amount of available credit that you’re using—is a major factor in determining your FICO Score. Once your current debt is paid down, you’ll get a boost in this area, which can help improve your credit score.
- Get more cash in pocket for other major purchases like cars or boats or planes or coffee tables
- Have more money for retirement – If there are no payments due on your home after age 62, then it might make sense to invest the money elsewhere so that it’s available when you need it most during retirement years
- Save on taxes – As an added bonus, any interest that you do pay over the course of a year is tax deductible (up to $100,000)
Pre-paying your mortgage can be a way to save money.
Pre-paying your mortgage can be a way to save money. By making additional monthly payments toward the principal, you can reduce the amount of interest you pay over time. As a result, you will pay off your mortgage sooner and save money over the life of the loan. This technique is called biweekly mortgage payments.
This strategy is less about saving money now—though it does that—and more about saving money in the future by avoiding interest charges. It’s also an effective way to reduce financial stress by paying down your mortgage quicker and creating more financial freedom in retirement. Oh, and it can potentially save you money on taxes, too!
If you refinanced or took out your current loan before 2014, it’s not to late to benefit from prepaying.
If you refinanced your mortgage or took out your mortgage before 2014, it’s not too late to benefit from prepaying. With a little creativity and discipline it is possible for you to pay off your loan early, regardless of whether or not you have an ARM loan.
When you take out a mortgage, the amount of interest you will end up paying over time depends on two factors: the length of your loan term, and the interest rate locked in with the original note.
You may have more of an incentive to prepay if you have either a high interest rate on your loan or a high income.
There are two major considerations when deciding whether or not to allocate extra funds towards your mortgage: your income and your interest rate. Both of these can greatly affect the overall financial benefit (or lack thereof) of pre-paying.
If you have a high income, it may make sense to pay down your mortgage early because you will have less incentive to draw from your taxable investments in retirement. On the other hand, if you’re in a lower tax bracket than you were while working, there may be less benefit because the earnings on your taxable investments will be taxed at a lower rate.
In addition to having more money to put towards paying off the loan early with a higher salary, those who earn more tend to save more during their working years. This means that they often have a larger nest egg for retirement and therefore feel comfortable depleting their savings accounts at a faster rate. Thus, high earners are generally more likely to pre-pay their mortgages because they have sizable rainy day funds to draw from if need be.
Pre-paying your mortgage makes sense for many homeowners, but it may not work in every situation. Talk to a professional before making decisions about major financial commitments like this one.
When you’re considering pre-paying your mortgage, here are a few questions/considerations to ask yourself:
- Do I have a fixed rate or an adjustable rate?
If you have an adjustable rate, it’s possible that interest rates will increase in the future. If the economy is on track for inflation and interest rates are likely to rise, then pre-paying a fixed-rate mortgage now can help protect against rising interest costs down the road. If you don’t think interest rates are likely to rise, then making extra payments might not make sense for you.
- How much am I paying in taxes?
In some cases pre-paying your mortgage can save you money on taxes because you can deduct what you pay in mortgage interest from your yearly federal tax bill. To figure out how much this applies to, take your current income and look at the chart below:
Tax Rate Married Filing Jointly Head of Household Single or Married Filing Separately
0% Up to $19,050 Up to $13,600* Up to $9,525
Develop a strategy for how you want to pay off your mortgage early, and stick with it.
- Develop a strategy for how you want to pay off your mortgage early, and stick with it.
- To create the budget that will allow you to write those extra checks, list all of your monthly expenses, including savings (don’t forget to factor in retirement contributions).
- Once you’ve listed your expenses, make a separate list of everything you can live without, or at least cut back on (think: cable TV, dining out, that gym membership you never use).
- Look at the difference between what you currently spend and what you want to spend and decide how you’ll allocate the extra money (you can put it toward your mortgage payment in one lump sum or an annual amount—or do an accelerated bi-weekly payment plan if your lender offers one).
In the age of bloated budgets and shrinking savings, it can seem tough to set money aside for any given expense or want. And while most financial experts would agree that you should be saving at least 20% of your income each month, it can be difficult to come up with a savings strategy that’s both financially prudent and simple enough that you’ll actually stick to it. Luckily, there is an easy way to save money—and pay down your mortgage—without even having to think about it.
The next time you’re struggling to find a way to make your budget work, try pre-paying your mortgage!
But why should you consider pre-paying your mortgage? And how do you even do it? Read on for everything you need to know about what prepaying your mortgage is, the benefits of doing so, and how to get started pre-paying today!
Whether you’re a new homeowner or you’ve been in your house for years, a question you’ve probably asked yourself is: Should I pre-pay my mortgage?
The truth is that the answer depends on your goals and financial realities—but it’s definitely worth considering. If you have the means, paying off your home early could save you a lot of money in interest fees over time, as well as open up more opportunities to invest in other things.
But even if that’s not possible right now, it’s still important to know what prepaying a mortgage means and how it can help both short-term and long-term goals. Read on to learn more about the benefits of early repayment and how to go about doing so when it makes sense for you.
Do you have a mortgage? Are you struggling to stay afloat with it?
Well, you’re not alone. In fact, most Americans are in the same boat.
Mortgage payments can be a huge burden every month. And although your mortgage is probably a good investment, that doesn’t make it any easier to deal with when you see it on your bank statement.
What if we told you there was a way to skip all of that?
That’s right: pre-paying your mortgage is the answer to all of your problems.
But how do you pre-pay your mortgage? And what’s the catch? Well, keep reading because we’re going to tell you everything!
There are a lot of options out there for managing your money. We’re going to look at one of them in more detail today: pre-paying a mortgage.
What’s the point of pre-paying?
You may have heard that you should pay extra on your mortgage when you can, but how does it actually help you? The simple answer is: interest.
The longer version is this: life costs money. All that stuff—travel, clothes, food, whatever—it all has to be paid for. And if you’re not careful, your debtors will end up owning everything you’ve ever purchased for the rest of your life, as long as you live… and maybe even after that.
This doesn’t mean “never buy anything again!” It means plan ahead! Plan ahead so that when you want something—a new car, or a big trip—you can get it without spending the next ten years paying off the people who helped finance it.
Pre-paying your mortgage is a great way to make sure you are prepared when life requires an unexpected expense. Paying off your home can also help ensure that if things get tough financially, you have somewhere safe and secure to live while things get back on track.
Many people don’t realize, but there are a lot of benefits to paying your mortgage early. And since it’s the largest debt that most people have, it makes sense to pay it off as quickly as possible. Paying off your mortgage early also gives you more financial freedom to do what you want with your money—like saving up for a nice vacation or buying a second home.
But how can you pay off your mortgage early? There are two main strategies: make bigger payments and pay bi-weekly instead of monthly. Both of these methods will allow you to pay down more principal on the loan, which means interest will accrue at a slower rate and the entire loan will be paid off sooner than if you had just been making regular monthly payments.
But what about taxes? What about insurance? How do those affect my ability to pre-pay on my mortgage?
Fortunately, most lenders allow borrowers to prepay their mortgages without any penalties. However, some do have restrictions on how much can be prepaid each year—this is usually around 20%. You should also check with your lender about whether or not there are any prepayment penalties for paying off your loan early (these are rare).
In addition to checking with your lender about their prepayment
Ah, the smarmy smile of your mortgage broker. You know the one I’m talking about—the one that happens when you hand over your mortgage payment on the first of every month.
Trust me, I’ve been there.
But what if you could wipe that smarmy smile off his face with just a few simple tricks? And what if those tricks also helped you save money on interest charges?
You can! And here’s how:
First, make sure you have a fixed-rate mortgage—a mortgage that you pay at a constant interest rate for the duration of its term. (In this article, “mortgage” refers to any loan that is taken out on real estate.)
And second, pay off your balance before it is due!
Easy enough, right? Well… yes and no. There are lots of considerations to take into account when deciding whether to prepay your mortgage—and we’ll get into those in a minute—but first let’s talk about how exactly you would go about prepaying yours.
If you have a mortgage, chances are you were given the option to pay it off early without penalty. And you might’ve thought to yourself, “I’ll get to that eventually.”
But how about now?