Many people choose purchasing a home over renting one so that they can own their own house to build equity, renovate as they please and have a space they own themselves. However, there’s one obligation between closing and true ownership: to pay off the mortgage.
For those who want to own their home outright as soon as possible, or those who want to reduce the amount of interest they’ll pay over the life of the loan, it may be possible to pay down their mortgage ahead of schedule. However, this decision isn’t a simple one; there are many ways to approach paying down your loan early. Further, it’s important to evaluate the pros and cons of getting rid of this debt.
Benefits of paying off your mortgage early
One of the biggest benefits of paying off your mortgage early is the cost savings. Your mortgage has an interest rate, which is applied to each month that you carry a balance.
If you pay off a 30-year mortgage in 30 years, you pay interest on 360 months, and that can add up to hundreds of thousands of dollars in time. Select calculated that the average homeowner pays more than $142,600 in mortgage interest over a lifetime based on the median price of a home and an interest rate of 2.78 percent.
If you’re able to pay off your mortgage in 20 years instead of 30, you can save a decade of interest payments – few people would complain about an extra $50,000 in their bank account.
Beyond cost savings, paying down your mortgage early means you’ll own your home outright faster and have less debt you’re responsible for.
Drawbacks of paying off your mortgage early
Saving thousands of dollars over the course of several years is an alluring incentive for many people to pay off their mortgages, not to mention relieving the responsibility of making that monthly payment. However, it’s important to consider all consequences of ridding yourself of this debt.
One of the biggest benefits of making monthly mortgage payments – and paying interest in particular – is the tax deduction. The average homeowner received more than $1,000 from their mortgage interest tax deduction in 2015, according to Tax Foundation.
New tax laws could change this, however. Homeowners who already had a mortgage secured by Dec. 15, 2017, will continue to qualify for the mortgage interest deduction. However, new homeowners only qualify if their mortgage is for $750,000 or less – previously, the cap was $1 million, according to the Wall Street Journal.
Another major drawback to consider when deciding to pay down their mortgage early: liquidity. If the only way someone can pay down their mortgage is through emptying their emergency savings account or by not routing funds to this account, it may not be the smartest move. It’s important to maintain a balance of liquid cash reserves to use in case of an emergency, like an unexpected medical bill or the loss of a job.
Methods of paying down your mortgage early
Once you’ve decided that paying off your mortgage ahead of time is worth the effort (and money), you’ll need to determine the most viable or beneficial option for you. Here are three common options:
Refinance to a shorter term with a lower interest rate
One of the most popular methods is through a refinance. Trading your 30-year mortgage for a 15-year mortgage cuts your loan term in half, and often comes with a lower interest rate. To pursue this method, you’ll need to apply for the refinance, get your home appraised and pay closing costs. It can be a bit pricey upfront, but you’ll wind up saving on interest in the long run.
Make more payments
Making more payments may be an obvious method to pay down your mortgage early, but there are multiple ways to approach this method. First, you can simply add a payment to the year: make a 13th payment at the end of the year with a bonus from work, or start the year off strong by dedicating your tax return to your mortgage.
Another method is to make payments every other week instead of just one each month. This will amount to 26 half-payments each year, equal to 13 full ones instead of 12.
Make your payments bigger
Simply making larger payments is another easy method for paying down your mortgage early. Here are a couple ways to approach this tactic:
- Round up: The average monthly mortgage payment is $1,030, according to The Balance. If homeowners round this up to $1,100, they’ll end the year having paid an extra $840.
- Use windfalls: Any time you have a surplus of cash (whether you were particularly frugal one month, got a bonus at work or received your tax refund), roll it into your next mortgage payment.
- Budget: Evaluate how you’re spending your money and determine areas where you can cut back. Use the savings to pad your payments.
Approaching your mortgage payment plan with a strategy can help you carefully budget and determine ways to save. If you have any questions about paying off your mortgage or home financing in general, reach out to a Bank Midwest mortgage banker.