Paying Mortgage Balance Early Before End Of Loan Term

This ARTICLE On The Benefits Of Paying Mortgage Balance Early Before End Of Loan Term Was PUBLISHED On May 22nd, 2020
Paying Mortgage Balance Early
Gustan Cho Associates

Paying Mortgage Balance Early Before End Of Loan Term is every homeowner’s dream come true:

  • A home is most people’s biggest investment in their lifetime
  • Most homeowners have a mortgage on their home
  • Most mortgage borrowers opt for a 30-year fixed-rate mortgage
  • The reason why 30-year fixed-rate mortgages are very popular is due to affordable payments
  • 30-year mortgage payments are amortized over a 30 year period
  • So it has substantially lower monthly payments than 15-year fixed-rate mortgages
  • Paying Mortgage Balance Early Before End Of Loan Term is every homeowner’s dream come true
  • There are no pre-payment penalties on owner-occupant residential mortgages
  • You do not need a 15-year fixed-rate mortgage to pay the loan balance in 15 years
  • Homeowners with 30-year fixed-rate mortgages can amortize their mortgage payments where they can pay off their mortgage loan in a shorter period of time without refinancing to a shorter-term
  • There are certain tips and tricks in paying mortgage balance early prior to the end of the loan term

In this article, we will discuss and cover the benefits of Paying Mortgage Balance Early Before End Of Loan Term.

Goal Of Paying Mortgage Balance Early

Every homeowner’s dream is Paying Mortgage Balance Early before the end of the loan term.

  • Most homeowners may just dream about it
  • However, others can turn the dream of Paying Mortgage Balance Early to a reality
  • Once a homeowner’s mortgage balance hits zero, the homeowner has full ownership of their home
  • However, property taxes and homeowners insurance still needs to get paid

Making extra mortgage payments towards principal reduction can expedite paying mortgage balance early.

Benefits Of Paying Mortgage Balance Early

There are many benefits to paying more balance earlier than the end of the term.

  • You no longer have to worry about making monthly mortgage payments
  • You can either save the monthly mortgage payments that you are supposed to make and use it for another purpose
  • Most homeowner’s single largest monthly payments are their mortgage
  • With a paid-off mortgage, most homeowners will be financially set and have expendable cash
  • With no more mortgage payments, homeowners will be saving money on interest expense
  • You own your home free and clear of any mortgage
  • The sooner you are mortgage-free, the less interest expense you will be paying over the course of the home loan
  • This may mean tens of thousands in savings
  • Many homeowners who are about to retire and/or in retirement can be financially set without a mortgage payment
  • Most retired folks rely on a fixed income

A large percentage of their fixed income can be their monthly housing expense. Without a home loan, all they need to worry about are just their property taxes and homeowner’s insurance.

Benefits Of Having Equity

What are the benefits of owning equity?

The benefits of having no mortgage on a home are like having a huge savings account.

  • Cash-in-hand often depreciates due to inflation
  • However, it has been proven many times over that real estate increase in value over time
  • Plus, real estate is one of the more safe investment one could make
  • Having a paid-off home means homeowners have equity in their homes
  • As the value of the home increases, so do the equity position of the homeowner
  • The more equity in a home, the more money homeowners can qualify to borrower against it through a HELOC and/or Reverse Mortgage
  • Or the more money homeowners can get when they sell their home
  • Equity is the value of the home less the home mortgage loan balance

Piotr Bieda of Gustan Cho Associates is also a licensed real estate expert. Piotr said the following:

Arguably the best part of paying down your mortgage is the peace of mind you have knowing that you are the sole owner of the property. This means that there are no more liens on your home, and it’s no longer collateral.

There are also cons in paying off a mortgage earlier than the term expiration.

Cons In Paying Mortgage Balance Early

There are also cons with paying mortgage balance early for homeowners. Homeowners with a mortgage can utilize tax deductions on their mortgage interest. Have a zero mortgage balance, the tax deduction benefits go away.

Martyna Szettel of Gustan Cho Associates said the following concerning the cons of paying mortgage balance off earlier:

Ties up your liquidity in your home. A liquid asset means the asset can be turned into cash without affecting its market value, such as cash and checking or savings accounts. If you’re spending all of your available funds on your home, you no longer have those liquid cash or account assets. Be careful not to invest more than you can afford because you won’t get that money back until you sell. Reduces the opportunity for a better return on investment. Before allocating extra funds to additional mortgage payments, consider all other avenues in which that extra cash can provide a better return. Options to consider and prioritize include: Pay off high-interest debt – Student loans, car payments, credit cards, etc. Be sure to eliminate all high-interest debt before you consider making additional mortgage payments. Invest 15% of your income into a 401(k) or Roth IRA. If you aren’t contributing 15% of your income to your retirement savings, plan to prioritize your additional funds to support your retirement goals. Determine if you need to prioritize other savings goals (i.e., college savings fund for your family).

One solution with regards to liquidity issues by having all of your cash tied up in paying off your home mortgage is to get a home equity line of credit (HELOC). However, homeowners need to be careful with spending and using funds from their HELOC.

Equity Versus Other Investments

Many homeowners rather have a mortgage and liquid cash to get a more return on their investment. Home values do rise over time. However, most investors will get a greater return on their money from the stock market. Historically, stock investors have averaged a 10% return of their money over the years. However, real estate is a more conservative investment.

Massimo Ressa of Gustan Cho Associates said the following:

The rate of return can vary over time depending on a variety of factors, but a return of 6%-7% would still be more beneficial than a 4% return from paying off a mortgage. It’s important to note that we are not professional investment advisors. Be sure to consult with an expert to determine if a stock market investment is right for you.

Paying off your mortgage earlier does not benefit everyone. It depends on the particular individual. Many like the idea of being mortgage-free. This is because nobody can foreclose on you when you are going through a difficult time financially. With a free and clear mortgage, the only financial responsibilities for the homeowner is paying property taxes and homeowners insurance. 

Best Way In Paying Mortgage Earlier

What is the best way to pay off your mortgage early

Just by paying your mortgage bi-weekly instead of monthly will shave six years off a 30-year mortgage term. If you discipline yourself and pay a little extra towards your mortgage loan principal, it can do wonders and shave years off your mortgage balance. Many homeowners religiously use all of their income tax refunds each year and apply it to their mortgage balance. Others may pay an extra few hundred dollars each month towards their mortgage loan balance. Make sure you tell the mortgage company that the extra funds are being used towards principal payment reduction.

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