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By prepaying your mortgage you can save thousands of dollars worth of interests. However, the decision of repaying a mortgage loan sooner should not be taken hastily as there are some loan terms that can turn such decision into a terrible and costly deal. Prepaying is only advisable under certain circumstances and provided that there are no special loan’s terms that make such decision an expensive one.
Owning fully your own home is desirable for almost anyone who has taken a mortgage. Paying off mortgage can be a noble goal serving you well in retirement. But there’s no rush either. Instead of saving significantly in interest by early paying off of mortgage, it can make more sense to spread payments over 30 years than putting extra money into additional mortgage payments.
Interest Can Be Tricky
Though interest on shorter mortgage is far less than on a longer one, it doesn’t mean paying off mortgage faster can save as much as expected. Most of the interest is paid in the early years. When amortizing a loan over 30 years, the first 10% of principal takes eight years to pay down. The rest is interest. When halfway through a 30-year mortgage, 67% of interest has been paid. In the 20th year, or two-thirds of the mortgage, 84% or interest has been paid.
Accelerating payments halfway through a 30 year mortgage saves very little in interest. It’s better to put the extra payments into a money market account, until actually due. The bank pays your interest instead. Unfortunately even working it out right to save thousands in interest, it could cost you more in lost opportunity. Focus instead on what the best use for your money is.
Less Expensive Variable Rates
Paying off mortgage early involves two common reasons. One, for a safety net in case of loss of jobs and to reduce income needs in retirement. Without a doubt the prospect of losing your home over missed mortgage payments is disturbing. The prospect of using most of your retirement income to a monthly mortgage is no better. Instead investing may make more sense.
Investing leads to a portfolio of securities with easy convertibility to cash. Cash can make a lot of mortgage payments if you’re collecting unemployment. Cash also makes car payments and groceries. If your house was paid for, a new mortgage can always be taken for more cash except if you’re out of work. Timing is unfavorable. Even if you get a mortgage it will not be very big with rates less than favorable. For a decent mortgage loan, more than a lot of equity in your home is needed. Regular income is a must making home ownership a lot less useful for emergencies than it appears.
So, only under certain circumstances, prepaying a mortgage can be to your advantage. Unless the money you spend on your mortgage payment is going mainly towards the principal, it makes no sense to accelerate repayment. Instead try to use the money to generate income and then, your mortgage monthly payments won’t be such a heavy burden.
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