This was originally published on Monday, June 6 ,2016 in the Pacific Daily News. Click here to subscribe to the PDN.
Nobody wants to pay a mortgage any longer than what the bank requires. It is nerve-racking to have such an enormous debt over a long period of time. There are many opinions to whether or not paying off your mortgage is beneficial or not. Last week I listed several reasons why it may not be wise to pay off your mortgage early.
Here are some reasons to pay off your mortgage early.
Peace of mind. Not owing money is a great feeling, and not owing thousands to hundreds of thousands of dollars is liberating. There is a sense of relief to know that your house is fully paid and that if you were to fall ill or lose a job, you will not be worried about where you will be living. You really can’t put a price on that feeling.
Savings on interest. Depending on the length of the mortgage term and the amount of the debt, you could be paying thousands to tens of thousands of dollars on interest alone. Paying your mortgage off sooner will free up any future money that would have been used towards your mortgage.
Close to retirement. If you are about to retire and expect reduced income, then paying off your mortgage may offer some much needed money to your budget. By eliminating the large payment, you will reduce your monthly expenses.
The bottom line is that you should do what you feel is best. There really is no wrong answer to paying off your mortgage early. It all depends on what is most important to you, where you are in life, and your future goals. Be sure that you review your loan contract. There may be some stipulations and fees that may arise from paying your mortgage off early. Talk to your mortgage provider and get a full understanding of your contract. If your interest rate on your mortgage is high but you want to keep the benefits of paying a mortgage you may want to talk about refinancing your home instead. If you have the money to pay the down payment and you choose a short term it may be worth exploring.
If you do decide that you want to pay your mortgage off early, contact the financial institution and let them know of your intentions. There are several ways to go about doing so.
Pay an extra 1/12th every month. Divide your monthly principal and interest by 12 and add that to your monthly payment. By doing so you add an extra payment at the end of the year. Let’s say you are 5 years into a $200,000 30-year mortgage at 4.5 percent. By adding that extra payment, you will have paid off your mortgage 3 years earlier and save more than $18,000. There are mortgage payoff calculators online that you can use to determine your additional payments and how much shorter your term will be.
Using the same mortgage and the 1/12th of the month’s principal and interest for the previous scenario, start making the extra payments from the start of the mortgage. By making that extra payment you will save $27,000 and reduce the term by 4 years.
Double up. Doubling up the monthly payment four times a year will reduce that same loan by almost 12 years and nearly $72,500.
Extra income. If you received a bonus or a raise, add it to your mortgage payments. Also, if you received a tax refund put it toward your mortgage principal.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.