Paying off your mortgage early can be the best feeling. You are finally mortgage-free and own your house! Your net worth instantly increases, and you no longer have to worry about paying interest on a loan.
It can be a great feeling, but did you know there are mistakes you can make when paying your mortgage off early?
If you don’t do it right, paying your mortgage off before it’s due could cause financial strain.
Here’s what you should know.
How to Pay Off Your Mortgage Early
Before we get to the mistakes you can make when paying your mortgage off early, you should know how to pay your mortgage off faster.
The easiest way is to make extra payments each month. It doesn’t have to be a specific amount. You can pay $50, $1,000, or however much you want toward your mortgage. You might pay more for some months than others if you have variable income. The key is to allocate the funds to your principal balance, and you’ll instantly decrease the interest you pay on your loan.
If you want a more structured method, here are some ways to pay your mortgage faster:
· Make one extra payment per year – Make one payment equal to a mortgage payment in addition to your regular payments. For example, if your mortgage payment is $1,000 monthly, make one extra $1,000 payment each year.
You can divide it equally and pay an extra $83.33 monthly or $1,000 at once.
· Make bi-weekly payments – Divide your regular mortgage payment in half and pay that amount every two weeks. There are 52 weeks in the year, so you’d make 13 monthly payments or one extra mortgage payment each year.
· Put windfalls toward your mortgage – If you receive a large tax refund, put it toward your mortgage rather than spending it. Most lenders allow you to pay the principal balance down at any time. Lowering your principal balance reduces interest costs and helps you repay your loan faster.
4 Things to Consider Before Paying Your Mortgage Early
It might seem like the right thing to do to pay your mortgage off early, but consider these factors first.
· Do you have an emergency fund?
Typing up your liquid funds in your home can lead to financial issues if you have an emergency. Make sure you have money saved to handle your monthly expenses for three to six months before using your extra money to pay your mortgage early.
· Have you invested in your retirement?
Your home may be your retirement, but you should also have a retirement fund. If you haven’t contributed to your 401K or IRA in a while, use your extra funds to load up your retirement account before investing it in your home.
· Is your employment stable?
Also, look at your employment. Does it seem stable? No one can predict the future, but you’ll know if your job is your ‘forever’ job or if it is temporary until you find something better. If you aren’t satisfied with your employment, don’t pay your mortgage early.
· Do you have a lot of high-interest debt?
If you have a lot of high-interest consumer debt, pay that off first before paying off your mortgage. Credit card interest almost always surpasses mortgage interest. You’ll lose money if you invest in your home and keep the credit card debt.
Advantages of Paying Your Mortgage Off Early
- Saves you money on interest
- Frees up money for investing in retirement or other financial goals
- Increases your net worth
- Frees up your monthly budget
Avoid These Mistakes When Paying Your Mortgage Off Early
If you think paying off your mortgage is right, here are the mistakes you should avoid.
· Not telling the lender the extra money is for the principal
You’d think a lender would know any extra money you send in is for your principal, but don’t assume. If you don’t specifically apply the funds to the principal, they may apply it to next month’s interest, derailing your efforts.
· Not making sure you have enough cash available
You could be in financial trouble if you put all your money into your home and don’t leave yourself with enough cash for unexpected expenses. The investment in your home isn’t liquid, so if you need money fast, you won’t get it from your home.
· Not asking if you have a prepayment penalty
Most mortgage loans today don’t have a prepayment penalty, but again, don’t assume. Ask your lender if prepaying your mortgage is allowed. At the most, you’ll have a prepayment penalty for the first three years of your mortgage, but always ask to ensure it’s okay to pay it off sooner.
Also Read: Factors to Consider Before Refinancing your Mortgage
· Not looking at other ways to use the money
Don’t get so focused on paying your mortgage off early that you don’t look at other options for the money. For example, if you can invest the money and earn more interest than you pay on your mortgage, you lose money by paying off your mortgage early. So, instead, exhaust all options before using the funds for your mortgage.
Final Thoughts
The benefits of paying off your mortgage early can be great if you avoid the mistakes of paying your mortgage off early. Ensure you have enough money for other obligations and unexpected expenses, and talk to your lender before paying your mortgage early.
Whether you make one lump sum payment or pay it off slowly, the sooner you pay your mortgage off, the more money you’ll save.
