Paying down your home loan early can save you big on interest over its lifetime. Here’s why you should knock down your mortgage faster.
The moment when your mortgage is paid off and you truly own your beloved piece of Seattle, WA, real estate is any homeowners’ equivalent of reaching nirvana. If you can swing it, paying down your mortgage faster will save you money over time and help you get closer to the peace of mind that comes with being debt-free.
Before considering paying down your mortgage quicker, you must confirm that your financial ducks are in a row: pay off all high-interest debt first (like credit cards), build a solid emergency fund, and make sure you’re saving at least 10% of your gross income for retirement. Once those areas are taken care of, you can turn your attention to paying down your mortgage. Here are four reasons why you should consider paying down your mortgage faster.
1. Save money on interest
You can save tens of thousands of dollars in interest when you pay off your mortgage ahead of schedule. The less interest you have to pay, the more money you’ll save — and the bigger your loan, the more you’ll save in interest. This is especially true if you pay off the loan aggressively from the start, when banks charge the most interest. Banks have structured mortgages so they get a large portion of their money early in the life of the loan — by mortgage years 20 through 30 you’ll be paying less interest than you paid early on. These are guaranteed savings because you’re building up the value of your home, whereas a return on other investments (such as a kitchen remodel) cannot be guaranteed. Just make sure your lender doesn’t charge a fee for an early payoff!
2. Build equity in your home
The faster you repay your mortgage, the more equity you’ll have in your home. “Equity” refers to the amount of your home that you actually own. When you sell, you’ll get more cash from the sale, since you’ll need to repay less to the bank. You can also leverage the equity in your home should you need it by taking out a loan or line of credit against the portion of the home that you own.
3. Give yourself peace of mind
Personal finance may start with numbers and math, but those aren’t the only components. It’s personal for a reason, and there’s an emotional and behavioral side to consider too. While some people may see their mortgage as a way to leverage their monthly cash flow (they can make a monthly payment over a long time and have other cash available to use elsewhere), other people view debt as a burden. If your debt causes you to lose sleep, this alone is an excellent reason to pay down your mortgage ahead of schedule. The peace of mind it can provide is well worth the effort to put extra money toward your payments.
4. You may not be getting any tax breaks
If you don’t itemize your taxes (and most people don’t, according to the IRS), you’re not taking advantage of writing off the interest that you’re paying on your home. And if that’s the case, then you can’t use tax breaks as an excuse for not paying off your mortgage faster.
Here are four strategies to pay off your mortgage faster.
• Base it on your retirement age. Simply count backward: If you want to retire by age 65, calculate how much extra you will have to add monthly or yearly to pay off your mortgage by that date.
• Consider refinancing. Homeowners who want to pay off their mortgage faster can refinance from a 30-year mortgage to a 15-year mortgage. This will increase your monthly payment, but you’ll cut your repayment time in half.
• Pay extra on each payment. You can generate a similar impact to the bottom line of your loan if you pay more each month on your mortgage. For example, if your payment is $800 per month, increase that payment to $1,600 per month. Just make sure the company that services your loan applies the extra to the principal on the loan, not the interest.
• Switch to biweekly payments. If sending in one giant payment every month sounds intimidating, consider breaking it down into two payments per month. Because there are 52 weeks in a year, you’ll end up making the equivalent of 13 months’ worth of payments in 12 months.