What do most homeowners dream of? To be mortgage-free! While that dream is obtainable, it takes planning and determination. If you're looking to own your home sooner, thus saving money on interest, and are considering paying off your mortgage early, be sure you're setting yourself up for success.
Paying off a mortgage early isn't for everyone. It could lead to significant financial strain if hasty decisions are made. So, how do you know if paying off a mortgage early is the right move for you?
If you're looking to own your home sooner than you originally planned for, here are a few situations where paying off a mortgage early can be a savvy move!
You Have an Emergency Fund
What can we take away from the devastating coronavirus pandemic that swept the nation? The importance of an emergency fund. Without dedicated funds to fall back on, many families turned to their savings or credit cards to stay afloat.
While paying off your mortgage early can help you save on interest in the long run, it's much more difficult to tap into your equity for quick-needed cash than it is to access an emergency fund. If you're wondering if you should be focused on paying off your mortgage early, ask yourself this: Have you created a solid financial safety net for yourself and your family?
Experts recommend having at least six months' worth of living expenses saved in the case of a sudden loss of income. If you've managed to build up your emergency fund and feel like you're on solid financial footing, it may be time to entertain the idea of increasing your mortgage installment so that you can pay your principal sooner.
You're Free of Debt
When deciding if it's worth it to pay extra towards your mortgage amount, consider any debt you have. What's the best use of your funds? In the long term, paying off a mortgage early can save a significant amount on interest, but letting your debt accumulate may mean you owe even more in interest over time. That's particularly true with credit card debt, as credit cards tend to come with high interest rates.
Are you able to pay down your debt while paying more on your mortgage? If not, carefully consider your bottom line. Being free and clear of debt has many benefits, including building up your credit score, so don't dismiss those bills in favor of putting a little extra towards your principal.
If you're debt-free, then it's time to consider paying more on your mortgage a few times a year!
You're Making More Money
Has your financial situation changed for the better since you first took on your mortgage? If you're making more money, allotting more for your mortgage could be a smart financial move.
An increase in income can help you establish both an emergency and a rainy day fund and help you pay down any debts you have. From there, you can start to funnel more money towards your mortgage principal. It may even be time to consider refinancing to a shorter contract term, especially if your financial health has improved. You could secure a competitive interest rate that helps you save thousands over the life of your new, shorter loan.
You Thoroughly Understand Your Contract
What's a costly mistake that homeowners make when it comes to their mortgage prepayment? They don't thoroughly understand the terms of their current contract.
Some contracts have prepayment penalties, meaning that if you were to pay off your mortgage before the agreed-upon term, you'd owe the lender a fee. In many cases, the fee is equal to a percentage that you would have paid in interest anyway, so you haven't done yourself any favors.
Many contracts have stipulations as to when a prepayment penalty would expire, so be sure you know how your lender handles prepayment before considering an extra payment or two. Also, be sure you're communicating your intentions with your lender, as many providers put anything over the installment amount towards your next monthly installment. Be clear that you're paying extra on your principal balance that month.
You Get Unexpected Money
While it doesn't happen often, there may be times when you get unexpected money that hasn't already been earmarked for bills, like a work bonus or a tax refund. That can be money used to pay down your mortgage principal.
The best part about paying off a mortgage early is that there is no set schedule you have to keep. You can make a one-time payment or slightly increase your monthly installment as you're able to. If you do find yourself with some extra money at the end of the month, consider using it for your mortgage over an impulsive buy.
A Little Bit Makes a Big Difference
Don't make the mistake of thinking that if you can't pay a large chunk of change towards your principal amount, that paying extra isn't worth it! Did you know that some homeowners have shaved years off their mortgage contract by just paying an extra $50 a month?
Here's how much Interest.com says you can save on a 30-year loan with a 3.5% interest rate if you paid just $50 extra each month: $12,356 and two years, seven months on your contract. If you paid $100 extra? You'd save over $22,000 and nearly five years!
Don't wait until you have an extra thousand dollars; pay more as you're able to throughout the year. You may be surprised to see just how much money and time you could save with increased payments here and there.
Refinance to Save Money
Even if you're not looking to pay your mortgage off early, you may still be able to save a significant amount on interest. How? By refinancing. Interest rates are currently at historic lows, and mortgage trends indicate that they'll increase as soon as the economy starts to bounce back.
That means that by waiting even a few weeks to refinance could mean missed savings opportunities. Easily see what rates and terms you qualify for right this instant with help from Lendgo.
Review Your Prepayment Situation Today
The fact of the matter is, mortgage prepayment isn't a smart option for all borrowers. If finances are tight, you're working on establishing an emergency fund, or you're just beginning a contract that still has a prepayment penalty in effect, now may not be the time to funnel more towards your mortgage principal. Instead, look into saving on interest in other ways, like refinancing your mortgage to a lower interest rate.
If you are in a position to pay a little extra every few months with no penalties to worry about, remember, every little bit helps! Even just 50 extra dollars a month can take years off of your contract, help you save thousands in interest, and allow you to own your home that much sooner!