Benefits of Paying Your Mortgage.
Benefits of Paying off Your Mortgage Early. If you are looking to buy your dream home or if you already found it and now entering a mortgage for it, then this article is for you. If you talked with your lender, then the banker offered you mortgage terms of 20-30 years for your home. Most people accept this mortgage term without thinking twice as it offers a low rate of monthly payments and opts for a term less than 20 years. Unfortunately, it increases your monthly payments by as much as 50%.
For this reason, most people do not even consider opting for early payment. This happens because you already have a mortgage calculating to 4500,000. Your monthly payments forecast to $4200 per month over 30 years and if you want to pay it off in 10 years, then the regular amounts will increase to almost $6000. Many people cannot afford to pay this amount each month.
But there are other considerations to acknowledge here. So let us look at some factors that may come into play if you pay off your mortgage early.
1. High Monthly Payment But With Less Interest Charged.
Paying off the mortgage early means that you need to pay higher monthly payments, but get rid of your mortgage debt early. Depending on how much you can afford to pay monthly, you pay off your mortgage early by a good margin of 10-20 years.
The very first advantage this option gives you relates to paying less interest. The interest payments on a 30-year mortgage are higher than compared to 20 or 10-year mortgages. This happens because of the time value of money. The longer the mortgage term is, the more time value becomes attached to it. You need to consider time value versus the opportunity cost of the lender. By lending your money for 30 years, the lender forgoes the use of an amount of cash, which they may want to invest elsewhere. For this reason, you pay the interest on it, to make up for the opportunity cost. So the longer they hold the money, the higher the opportunity cost may be.
Therefore, in simple words, the shorter the mortgage term, the lesser the interest payments become. So in the short term, you may have to pay higher monthly payments, but you will end up paying a lot less for a 10 or 20-year mortgage as compared to a 30-year mortgage.
2. Paying Off Mortgage Early Means You Get To Save More After The Debt Is Paid Off.
Second, the above discussion one can apply retrospectively. Paying off the mortgage early will also free up your money. If you do not pay off your mortgage early, then they will tie your money in monthly payments for 30 years. But if you increase your payment ability, the opportunity for you to gain access arrives quicker.
3. High Payments Reduce The Propensity To Save and Invest.
There is however one drawback of paying early, and this one is most commonly cited by the opponents of early payment. When you pay off your mortgage before the time, it creates higher monthly payments and these returns impact on your available daily budget. It reduces your ability to save and invest your capital in the short term. For instance, if you make extra payments of $2000 by opting to pay a mortgage in 15 years instead of 30, this means, each year you set aside an extra $24000. This means over 15 years this amount goes up to $360,000. Critics of early payment say that you can easily save and invest this amount and earn a rate of return between 6-10%.
4. What if You cannot afford the High Monthly Payments?
There is one more thing to consider. What if you pay off your mortgage early because you can afford the high monthly payments, but within 5 years you lose your job or you cannot afford to make ends meet? What will happen then? You can always negotiate with your lender to increase the mortgage term, but this may require some settlement charges. This results in you paying more in interest charges over the longer term.
This, however, does not mean that you should not make early payments, no. What this means is that before deciding to pay your mortgage early, you need to consider all factors at play. Surely paying off the mortgage early presents its benefits, the biggest advantage is that you get to pay less. A lot less than compared to a 30-year mortgage, but it also depends on how you plan your finances.
Benefits of Paying off Your Mortgage Early. So as a final word, if you are about to sign your mortgage contract, take some time to weigh both options. Both sides offer their pros and cons. If you want to pay your mortgage early, review your financial position, discuss and make a plan to determine the option that works for you. Early payments depend on your ability to manage the high monthly payments.