5 Mistakes to Avoid When Paying Off Your Mortgage Early
-
Loading... - Carlos Costa
- 28 Jul 2022
- 109 Views
- 0 Like
- 0 Comment
If you can afford to pay off your mortgage ahead of schedule, you’ll save some money on your loan’s interest. In fact, getting rid of your home loan just one or two years early could potentially save you hundreds or even thousands of dollars. But if you’re planning to take that approach, you’ll need to consider if there’s a prepayment penalty, among other possible issues. Below are five mistakes that you should avoid when paying your mortgage off early. A financial advisor can help you figure out your mortgage needs and goals.
What Does It Mean to “Pay Off Your Mortgage Early?”
Many homeowners would love to fast forward to when they own their houses outright and no longer have to worry about monthly mortgage payments. As a result, the idea of paying off their mortgage early could be worth exploring for some people. This will allow you to lessen the amount of interest you’ll pay over the term of your loan, all while giving you the ability to become the home’s full owner earlier than expected.
There are a few different methods by which you can go about paying early. The simplest method is just to make extra payments outside of your normal monthly payments. Provided this route doesn’t result in extra fees from your lender, you can send 13 checks each year instead of 12 (or the online equivalent of this). You can also increase your monthly payment. By paying more each month, you’ll pay off the entirety of the loan earlier than the scheduled time.
If you’re considering paying off your mortgage ahead of time, make sure you avoid these five critical mistakes.
Mistake #1: Not Considering All of Your Options
It can be very tempting if you come into some extra money to put that toward paying your mortgage off ahead of time. However, getting out of debt a little bit earlier may not be the most remunerative choice to make. To illustrate this, let’s look at an example.
Let’s say you’re considering making a one-time payment of $20,000 toward your mortgage principal. Your original loan amount was $200,000, you’re 20 years into a 30-year term, and your interest rate is 4%. Paying down $20,000 of the principal in one go could save you roughly $8,300 in interest and allow you to pay it off completely 2.5 years sooner.
That sounds great, but consider an alternative. If you invested that money in an index fund that represents the S&P 500, which averages a rate of return on 9.8%, you could earn $30,900 in interest over those same 10 years. Even a more conservative projection of your rate of return, say 4%, would net you $12,500 in interest.
Everyone’s financial situation is unique, and it’s very possible that the notion of being out of debt is so important to you that it’s worth a less than optimal use of your money. The important thing is to consider all of your options before concluding that paying off your mortgage earlier is the best path for you.
Mistake #2: Not Putting Extra Payments Towards the Loan Principal
Throwing in an extra $500 or $1,000 every month won’t necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you’re paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
If you’re writing separate checks for extra principal payments, you can make a note of that on the memo line. If you pay your mortgage bill online, you might want to find out whether the lender will let you include a note specifying how additional payments should be used.
Mistake #3: Not Asking If There’s a Prepayment Penalty
Mortgage lenders are in business to make money and one of the ways they do that is by charging you interest on your loan. When you prepay your mortgage, you’re essentially costing the lender money. That’s why some lenders try to make up for lost profits by charging a prepayment penalty.
Prepayment penalties can be equal to a percentage of a mortgage loan amount or the equivalent of a certain number of monthly interest payments. If you’re paying off your home loan well in advance, those fees can add up quickly. For example, a 3% prepayment penalty on a $250,000 mortgage would cost you $7,500. Read More...
