Everyone wants to pay off their mortgage early but there are certain things you need to know before you begin making extra payments on your home.
If you are a homeowner, looking to pay off your mortgage early, this blog is for you. In this blog, we will discuss the pros of paying off your mortgage early, the cons of paying off your mortgage early, the questions you need to ask yourself, and we will answer the question of “How much can I save by paying off my mortgage early”.
Why pay off your mortgage early?
Why should you repay your mortgage early? Some of the pros of paying off your mortgage early include:
Save money on interest:
One of the biggest advantages of paying down your mortgage early is saving money on interest. A longer loan term means paying more interest.
For example, borrowing $400,000 for a home loan at a 4% interest rate with a 30-year loan term equates to approximately $290,000 total in interest. A 15-year loan under the same conditions results in approximately $130,000 total in interest.
That is a $160,000 saving from reducing the mortgage loan term.
Financial freedom:
Being mortgage-free clears a large monthly expense off your shoulders meaning your future income can be used for other financial goals or cravings. You have more freedom and flexibility to use your money the way you would like.
Peace of mind:
Another benefit of paying your mortgage off early is having peace of mind knowing you no longer need to meet monthly mortgage payments. This peace of mind reduces your financial stress and means you can live a happier life.
Why not pay off your mortgage early?
Why should you not repay your mortgage early? Some of the cons of paying off your mortgage early include the following:
Opportunity cost:
The money that is used to pay off your mortgage early could be invested in other areas like the stock market or other properties. The money invested in other areas can potentially earn a higher return than the benefit of paying off your mortgage.
Lack of liquidity and cash flow:
Paying your mortgage off early means you are restricting your level of funds available. As your money is in your home’s equity, you are limiting your access to cash for necessary expenses.
Early repayment fees:
Some mortgage lenders or products may require you to pay an early repayment fee. Talk to your mortgage lender to see if this is the case.
Questions to ask before repaying your mortgage early
The decision to repay your mortgage early depends on your personal circumstances. That’s why it is important to ask yourself questions such as the following:
Do I have enough cash in reserve:
Before you pay off your mortgage it is important to ensure that you have enough cash in reserve to pay for emergencies or unexpected expenses. You should have enough cash to cover 3-6 months’ worth of expenses.
Do I have more expensive debts to pay off first:
If you have other loans that incur high-interest rates, such as credit cards, it may be better to pay those off first. This means you are saving money in the long run.
Does my lender charge an early repayment fee:
Some mortgage products and lenders will charge an early repayment fee if you repay your mortgage early. This is a question you need to ask as repayment fees can be expensive.
How much can I save paying off my mortgage early?
You may have asked yourself, “How much can I save paying off my mortgage early?”. We have provided an example of a first recurring payment and an example of a one-off lump sum repayment.
First recurring payment example:
Finn has a 30-year, $300,000 mortgage with a 5% interest rate. Monthly repayments for the loan are approximately $1,600. Finn is set to pay almost $280,000 in interest on his loan.
If Finn made extra contributions of $100 per month, he would pay approximately $240,000 total in interest. That’s a saving of $40,000 and 3 years, 8 months off paying his mortgage.
One-off lump sum repayment example:
Barbra has the same loan conditions as Finn. After taking a loan from the bank Barbra receives $15,000 from other means. Barbra decides to make a one-off lump sum repayment of $15,000 in the first year of her loan term.
Barbra will pay approximately $236,000 total in interest repayments over the course of her loan. That is a saving of $44,000 and 3 years off her loan term. Paying off your mortgage early can be very beneficial for home buyers, but the decision ultimately depends on your own circumstances. If you have better opportunities in purchasing higher-returning assets, you need access to money in the short term, or your lender charges high early repayments fees, you may not choose to pay your mortgage off early. Paying off your mortgage can save you thousands of dollars of interest payments, and provide financial freedom and peace of mind.
Are you looking for a mortgage lender?
One Click Life can help you choose a lender that best suits you while keeping more money in your pocket. Why wouldn’t you use a mortgage lender if it meant saving money on your mortgage? One Click Life has an experienced team of mortgage brokers that make finding a lender a simple process. One Click Life can also take care of your Taxes, Will, and Health Insurance so you can focus on more important things.