What are your reasons for paying off the mortgage early?
Being a homeowner comes with tons of responsibilities and benefits. I bet you cannot compare the freedom and comfort of living under your own roof to anything else. However, the process of getting rid of the mortgage payment is not a piece of cake. Paying the mortgage in full sounds so cool and you might be wondering whether it is a good strategy.
It is a no-brainer that paying off a loan early saves you a lot of money you would have incurred on interest. The savings can be very substantial. The other merit is psychological: owning your home completely and knowing that you no longer have a burden of making payments each month. It is one of the best decisions to help you boost your investment portfolio. Maybe you’ve been paying 7% interest and investing only 3%. It is imperative that you calculate the real cost of a mortgage as well as the ROI after tax so you can make educated decisions.
The state of being debt-free appeals to different people in different ways. If you are determined to eliminate monthly installments for good, carefully examine your reason. Will you be comfortable with no money in your bank account but debt-free? Or would you rather keep money in your account and continue paying monthly payments? It’s all up to you. If you don’t like having debts, it is such a good move but liquidity is equally important.
If you are considering paying off the mortgage, we have gathered 5 points to encourage you even more.
1. Minimal expenses in your retirement age
If you are getting ready for retirement, you obviously want to reduce your expenses as much as you can. Generally, mortgage installments take up a quarter of the pre-retirement income. This is a significant expense you don’t want to deal this in your better days. If you can eliminate this burden, you will be more than ready to retire.
2. Saving money on interest
Clearing your home loan before the amortization deadline saves you a lot of interest expenses. If you are close to paying off a high-interest mortgage, you may not experience the benefit of refinancing due to the high costs. But being rigorous in debt repayment can save you on interest. Then you can direct the savings towards your investment plans. If you have a variable rate o your mortgage, early repayment can help you escape the potential increase in interest rates.
3. Tax-deductible interest
As you approach your retirement age, it goes without saying that you want a stress-free life. You can achieve it by paying off your debts and saving more. It is easier to think that saving for retirement is better than paying off a debt. It could be true when your employer matches the monthly contributions. But, there are tax deductions that apply to mortgage interest, which can save your money as well. It is important for you to establish a balance in your current income so you can contribute to retirement savings as you pay off your home loan.
4. More profit when downsizing
At some point, you might want to downsize your home to reduce the maintenance cost. This is a common practice of homeowners who are approaching retirement. You can use a part of the sales proceeds to your retirement contributions and perhaps purchase a smaller property. With more equity in your home, you are bound to get more profit upon selling it. In short, if you still owe the bank some mortgage, you can it off before you take the profits. Once you cleat the loan, you will have more funds at disposal for your retirement and the new home.
5. Less expenditure
Not so many people understand the difference between needs and wants. That is why they end up overspending their income. If you are a smart saver, you should consider increasing the mortgage payments as soon as possible to increase the chances of a more comfortable retirement age. Stop spending your income on things you don’t actually need and start channeling it rightfully.
In general terms, a home buyer comfortably pays a mortgage which is worth 25% of their income, assuming that the income doesn’t reduce in the course of the mortgage terms. If you are keen on your retirement timelines, you will make more informed decisions concerning the type of mortgage to take. Saving for retirement is a practice that should start as soon as you get a job. Staying debt free is equally important.
Tips for paying off your mortgage faster
If you still think that paying off the home loan earlier is not possible, consider this: take your mortgage account as a savings account. Start putting an extra $1000 or so per week and watch it balloon. This is a big incentive as you watch the years go by. Most successful homeowners have managed to reduce their mortgage terms from 25 to 10 years or less and established significant equity to invest in another property. It is much easier if you and your partner are employed. You should join forces with the double income. Soon, you will enjoy a happier family without the stress of meeting installments every month.
Smart borrowers always have a contingency plan for their ongoing debts. In the event that you don’t have an income due to illness or loss of employment, how do you plan to pay your mortgage? Experts advise homeowners to maintain medium to long-term investment time horizon when you are in debt. Also, make sure that you have a robust risk tolerance to cope with the high risk involved with debts.
Since you cannot predict how the interest rates will behave in future, it is important to model affordability on rates which are 2% – 3% higher than the current rates. This ensures that your home loam remains affordable in the event that the interest rates hike. It is all about being financially smart.
Ask any expert around and they will tell you that paying off the mortgage is one of the smartest decisions you can make today. If you borrow money to have a place to stay, why not own it outright? It gives you the ability to build more wealth beyond owning a home while being tax effective at the same time.
Who doesn’t dream of owning a home? Only when you pay off a mortgage can you call the property your home. You achieve a new realm of financial freedom that can be incredibly rewarding in the long term. Check out how much mortgage you can afford.