Homeownership is a goal that everyone aspires to, as it offers a sense of security, both in economic terms and in sentiment. Families rest easy knowing they are in THEIR home and nobody can take it away from them.
Moreover, mortgage payments tend to be a hefty amount and many carry the burden of making these payments well into their retirement, compromising their quality of life in their golden years.
Considering this, you should know there are ways to pay off a mortgage early. Not only do you get to enjoy your retirement without the burden of having to make mortgage payments, but you also get to enjoy the security of completely owning your own home sooner.
So, without further adieu, let's discuss the different ways you can pay your mortgage off early.
Pay More Than You Owe
This is the most commonly exercised option for paying off mortgages early. Paying extra every time your mortgage payment is due or making balloon payments are ways in which you can quickly relieve yourself of the burden of your mortgage.
Paying an extra couple of hundred dollars each month will bring down your balance at a faster rate. You’d also be shortening your mortgage term over time as you pay off your balance with the extra payments and reduce the amount of interest you’re paying as well.
Making balloon payments is also a great way to get rid of your mortgage faster. If you can’t spare any more money every month to pay extra, then you can use things like your year-end bonus, a tax refund, or some other substantial sum of money you may have come across to make a balloon payment, reducing your outstanding balance significantly in one go.
You should make sure there aren’t any heavy penalties for early payments though. Most banks and mortgage providers will have such a penalty as a way to make some money since they’re losing out on all the interest that you would have had to pay originally. So be sure to do the math and make sure you aren’t losing out on a lot of money.
Create A Mortgage Fund
The money you would use to make extra payments or balloon payments could also be used to create a mortgage fund. You can invest in different investment instruments, like stocks, mutual funds, or a fixed-income account, and use any proceeds to make repeated balloon payments.
This option also allows you to retain your hard-earned money instead of just giving it to the bank. You can use this money in an emergency situation if needed and, until then, use the returns from it to pay towards reducing your mortgage balance.
Just some advice; rather than investing in anything complicated and risky, it’s best to play it safe with your investment and invest in something simple, like a savings account. A savings account offers a good return, usually around 4%, and is usually backed by some form of assurance, which makes it virtually risk-free.
Some other low-risk investment options are real estate and government and treasury bonds.
Consider Refinancing
Standard mortgage terms last for 30 years and, for someone who is investing after 30, it's a guarantee that they'll be making mortgage payments after they've retired. Luckily, you have the option to refinance and reduce your mortgage term so you'll be done with your obligations faster than originally anticipated.
While the standard term is 30 years, when refinancing you can choose to opt for 10, 15, or 20 years as well. However, a shorter term means that your monthly payment amount will go up, but the good news is that you’ll also be saving money in other ways.
A shorter term means you’ll be paying a lot less interest in the long run, and you’ll need to make fewer mortgage insurance premium payments too. You could also get better interest rates if your credit score is good, which means you’ll be paying even less.
Also, chances are you’re making more money now than you were when you first got your mortgage, so affording a higher mortgage payment becomes manageable.
The Disadvantages of Paying Off Your Mortgage Early
You should also know that while all of the options we’ve discussed above can help you pay off your mortgage early, they have their own disadvantages as well.
Paying more than what you owe or making balloon payments rests heavily on your affordability and is a more suitable option for those with multiple sources of income. Extra payments could also result in prepayment penalties.
A mortgage fund makes it possible for you to retain more money, create another source of income, and pay your mortgage off early, but if your investments fail then you’re back to square one. You’ll also be liable to pay taxes on any earnings from your mortgage fund.
Refinancing your mortgage could be subject to a mortgage closing fee and you’re entirely dependent on prevalent interest rates. Moreover, if your credit history isn’t great then refinancing could end up costing you a lot more than what you’re already paying.
These disadvantages should not put you off the idea of paying off your mortgage early. The sole reason for mentioning these is so you have a complete idea and can assess which option best suits you.
Consult With A Financial Advisor To Make More Informed Decisions!
While we hope this article gave you some of the basic information on strategies to pay off your mortgage early, it might still be prudent to speak to a professional to see which option suits you and your financial profile the best.
Speaking to trained and certified professionals means you’re being guided by financial advisors you can trust and who will give you advice that is backed by knowledge and experience.
