Paying Off Your Mortgage Early: Advantages and Disadvantages

By Mabel Ekperen

Clearing off your home mortgage could save you tens of thousands of dollars in interest payments. However, before you start pouring money at it, there are a few things to think about to see if it’s a good idea.

In this article, we shall discuss the advantages and disadvantages of paying off debt early, as well as some strategies for lowering your loan’s interest rate.

Getting a Head Start on Your Mortgage Payments

Your monthly mortgage is apportioned to both your principal and interest each time you make payments and within the first few years of your mortgage, most of your cash goes into interest.

Yet, as you pay down your principal or the sum you obtained initially, you owe less in interest and it is worthy of note that a substantially larger portion of your payment goes toward principal, only towards the end of your loan term.

Therefore, extra payments can be applied straight to your mortgage’s main balance, and these extra primary payments lower the sum of money you will have to pay interest on before it accrues. This can save you hundreds of dollars and years off your mortgage tenure.

Determining Whether Paying Off a Mortgage Early Is Reasonable

To determine if you should pay any additional money into your home debt or refinance to a relatively short term if you have any spare cash at the end of the month, don’t have a straightforward “yes” or “no” response. This is because settling off your loan early or modifying loan terms has both risks and advantages, and the best course of action for you may be different for another.

Timing The Best Period to Pay Off Your Mortgage Early

Maybe you believe that paying off your mortgage early requires hundreds of dollars extra per month, but the reality is that even a tiny recurring monthly payment can have a significant impact throughout the life of your loan.

A monthly contribution of $100 extra could help you pay off your mortgage years sooner and to pay off your mortgage, you don’t need to find a way to make an extra $20,000 per year.

Those with adequate funds to offset an emergency are the prime choices for early mortgage payoffs, so before you start paying off your debt, ensure you have at least 3 to 6 months’ worth of living expenditures in liquid cash.

When Paying Monthly Minimum Payments Is Effective?

If you have other debts to deal with, focusing on paying off your mortgage early may not be a wise option. The interest rates on credit cards, student loans, and other types of debt are frequently greater than those on most mortgages. This means they will rack up interest more quickly.

You will end up saving money if you start repaying these debts rather than putting all of your earnings toward your mortgage. It’s a good idea to spend time with your financial documents and analyze the interest rates on your other obligations to the interest rate on your mortgage and you should pay down your other loans first if they have a higher interest rate.

Also, if your loan has a prepayment penalty, you should forgo paying it off soon. This is a cost charged by your lender if you pay off the loan early. Prepayment penalties are normally equal to a percentage of what you would have paid in interest if you hadn’t made the payment.

This suggests that if you settle off your principal early enough, you may ultimately pay interest that you would have paid otherwise. Prepayment penalties normally last for a few years after the loan is taken out.

Before making a substantial additional payment, check with your mortgage lender to see whether there are any prepayment penalties on your loan. Your mortgage agreement will also state any prepayment fines.

When Early Mortgage Repayment and Other Financial Responsibilities Can Be Balanced

Before you consider paying more money for your mortgage, be sure you have a healthy domestic cash reserve. If you don’t have any liquid cash, an unanticipated vehicle bill, medical costs, or another item can throw your budget off.

While a refinance can help you access funds from your home equity, it takes time, which you may not have in an emergency. Before you invest any additional revenue toward your mortgage loan, be sure you have enough money put away for contingencies.

Furthermore, if you have some large spending coming up, you may want to hold off paying off your mortgage and you could make investing in your 401(k) or IRA your first primary concern.

How to Get Your Mortgage Paid Off As Soon As Possible

Change Your Repayment Plan to Biweekly

Paying your loan biweekly rather than monthly is an easy strategy to pay off your mortgage faster. For example, instead of paying $1,000 at the end of the month, you may pay $500 every two weeks.

Because there are 52 weeks in a year, sticking to this timetable will allow you to make 13 payments on your loan rather than the usual 12. This allows you to pay down your debt more quickly without feeling strained financially.

Commit To a Yearly Additional Payment

According to the IRS, the average American receives a tax refund of $2,833. That’s more than enough money for most folks to cover an extra monthly mortgage each year.

Refinance Your Loan to Make It Shorter

When your monthly income increases, refinancing to a relatively short term might be a good option. You can save money on interest by refinancing your mortgage without thinking of the consequences of having to make additional payments. It also helps you to complete your home purchase considerably more quickly.

Bear in mind that shortening the duration of your mortgage can raise your monthly payments, therefore, before you make that decision, do the numbers, and make sure you can afford the additional costs.

In the long term, settling off your mortgage early will save you a lot of money and even a minor increase in your monthly payment will help you get your house sooner.

Before putting money into your debt, be sure you have an emergency reserve. Also, before you add to your current mortgage payment, it’s a good idea to provide for retirement and pay back your other debts.

You can pay off your mortgage sooner by making additional payments, refinancing, or modifying your repayment plan, however, before making any major decisions, it’s usually a good idea to visit a money manager.