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While it’s not the right decision for every homeowner, and not possible for those on a tight budget, paying off a mortgage in full is a goal for many people.
Whether it’s just for the psychological freedom of eliminating what is the largest budget item for most households or to reduce expenses before retirement, speeding up your mortgage payment can be a smart financial move.
We sought the advice of Pete Boomer, executive vice president of mortgages at PNC Bank; and Melody Robinson Wright, director of financial education at Kinly. Both replied via email and their responses have been edited.
What are some of the reasons a homeowner might want to pay off their mortgage faster?
Wright: Knowing that you own your home outright is a great incentive to pay off your home early. Some homeowners may seek early payment to save on interest, free up cash, or reduce their overall debt load before they retire or reach other life milestones. Paying off your mortgage early also lets you say goodbye to private mortgage insurance (PMI) fees, as they can be eliminated once you reach 20 percent of home equity. With PMI fees ranging from 0.5 percent to 2 percent of your loan balance, freeing up this money allows you to use it elsewhere, such as improvements to increase home value or to take advantage of asset building opportunities. wealth.
boomer: Another great advantage of paying off a mortgage more quickly is building equity in the property. A very effective strategy to achieve this is to make an additional monthly payment per year. Homeowners can pay off a typical 30-year mortgage eight years early by doing so.
What are the pros and cons of paying off a mortgage early?
Wright: Paying off your mortgage early reduces your debt burden and potentially saves you thousands of dollars in interest. However, depending on how aggressive your payment schedule is, you may not be able to meet other financial goals or miss out on opportunities to grow your money through investments. With a mortgage paid off, you would also lose the ability to take advantage of tax deductions for mortgage interest payments.
boomer: A clear advantage is that it eliminates the monthly mortgage payment, which allows owners to face other debts or invest in other companies. Also, an early payment will reduce the amount of interest the homeowner will pay over time. One potential drawback to paying off a mortgage early is that it can carry a prepayment penalty, so it’s important to understand the details included in your loan documents.
What are the advantages or disadvantages of various methods to speed up your mortgage payment?
Wright: a) Lump Sum – Making a lump sum payment can reduce the amount of time it takes to pay off the loan, as well as reduce the amount of interest paid over the life of the loan, saving you a good deal of money. A large balloon payment can also be advantageous if you can reformulate the loan. When refunded, the loan is amortized back to the lower principal balance amount, resulting in a lower monthly payment. However, some loans, such as FHA or VA loans, are not eligible for recast, fees may be charged, and other criteria, such as a minimum lump sum paid, may need to be met to qualify for a loan recast. loan. b) Extra monthly sum: Paying extra on your loan regardless of the amount can reduce your total interest and the duration of the loan. The downside is that you may need to follow special rules to make sure the extra amount is applied to your principal, and follow up to make sure the payment was applied correctly. c) Extra Annual Payment: Making an extra annual payment is advantageous because it reduces the length of your loan while potentially saving you thousands of dollars in interest. d) Biweekly Payments: Biweekly payments work in your favor by giving you one additional mortgage payment per year for a total of 13 payments instead of making 12 payments. This can help you save a good amount of interest. The downside is that some lenders may not offer you the option to make biweekly payments or may charge you an additional fee. e) Refinancing to a short-term loan: Refinancing to a short-term loan can reduce the length of the loan and the amount you pay in interest. However, before you refinance, you should make sure that the benefits outweigh the cost of refinancing your loan and that you can afford the higher monthly mortgage payment.
Any advice to offer to people who want to pay off their loan faster?
Wright: If you’re looking to pay off your loan faster, create a plan for how quickly you’d like to pay it off and consider what changes you could make to your current budget or spending plan to help you achieve this goal without getting in the way of others. financial goals. Even without refinancing, you can pay off a 30-year mortgage like a 15-year mortgage by making extra payments. You can also pay off your loan faster by creating a rule to put a percentage of any money earned or received from side activities, windfalls, or bonuses toward your mortgage.
boomer: A good option is to automate the initial payment. This can be done by dividing the monthly payment by 12 and applying this additional amount directly to each month’s principal. Automating these payments and making this a part of a homeowner’s monthly budget is a great way to achieve faster home loan amortization.
Source: www.washingtonpost.com