Should you pay off your mortgage early?
Make sure your
loan has no prepayment penalty. You can make an extra payment once
a year, pay every two weeks instead of every month, or just send
in whatever you can afford above your normal monthly mortgage payment.
The larger the extra payment and the sooner you make it, the faster
your mortgage will be paid off and the more you will save in interest.
Often sending
about $100 in extra principal per $100,000 of loan amount
each month will take 10 years or more off the life of your loan.
Of course, this varies depending on your interest rate.
Here are some
ideas on how to budget your extra principal payments:
Are
you paid every 2 weeks?
Put 1/2 of your mortgage payment into a separate account and make
your house payment from that account.
52 weeks
= 26 paychecks = 13 times your house payment. In other words you
will automatically save one extra payment each year. Send this
in as extra principal at the end of the year and you will shave
several years off the life of your loan. And save thousands of
dollars in interest.
Use an outside investment to build up what you'll need to pay
off the mortgage 20 years from now.
One option is a cash value life insurance policy. Another is your
company retirement account. Whatever the investment you choose,
the goal of this account is to equal or exceed the balance of
your mortgage 20 years from now. Then in 20 years you simply pay
off the loan. An advantage is that your money is somewhat available
for a "rainy day". If you use life insurance you also add protection
in case of death. The death benefit can be used to pay the mortgage
balance.
Most people never
even think about paying off their home early. However, you can make
a big step toward financial independence by having a plan to eliminate
your house payment. There are surely other ways beyond what we have
listed here. What is amazing is how little it adds to your monthly
cost to cut your mortgage's life by 10 years. |
