How to Pay Off Your Mortgage Early

You do not always need to stick with agreed-upon terms, especially when it comes to mortgage payments. You can get rid of your home loan early. Paying off a mortgage early saves money, reduces interest payments, and also improves a borrower’s financial stability. Several ways are available for paying off home loans early, such as refinancing your home, shortening loan terms, and making extra payments on a monthly or yearly basis. 

This blog helps you understand the importance of paying off your mortgage early and its involved complexities. If you, too, want to take advantage of this opportunity, then give it a read to learn about the processes and the most brilliant way to pay off your mortgage.

What Is Mortgage And Mortgage Payment?

A Mortgage is a type of loan used to buy a home, land, or other kind of real estate. Basically, it is an agreement between a lender and a borrower that allows the lender to take the borrower’s property if he fails to pay back borrowed money and interest payments. A mortgage payment is basically the repayment of a mortgage, or it is a monthly or periodic payment made by a borrower to pay back a mortgage or home loan.

Benefits Of Paying Off Mortgage Early:

Getting rid of mortgage payments offers a multitude of benefits and represents a significant milestone in the financial journey of a borrower. Here are a few pros of paying a home loan early.

Reduces Interest Cost

The Interest payment on a home loan often becomes a financial liability. Paying interest payments is equally important as clearing the amount of borrowed money. Normally, the longer you carry a mortgage, the more you have to pay in interest and vice versa. So, by paying off your home loan early, you can significantly reduce the cost of interest. If the interest rate is high, then you can save a significant portion of your money by paying off your mortgage early.

Quickly Builds Home Equity

If you pay off your mortgage early, you increase the portion of your home that you own truly, which is called equity. Paying off a home loan early builds up equity in your home swiftly. Higher equity gives you more leverage. First of all, it improves your financial standing, enhances borrowing power, and allows you to consider other types of loans at lower interest rates. If you decide to sell your property or home, higher equity allows you to earn more money after paying the remaining charges.

Boosts Cash Flow

Your monthly mortgage payments require a significant chunk of your monthly income. However, if you pay your mortgage early, it will boost your monthly cash flow. You will have more money to spend on other requirements and needs. Basically, it frees you from this financial burden and bolsters your savings and emergency funds. Furthermore, you may also invest these funds and make a profit out of them. 

Provides Peace Of Mind

Paying off your mortgage payments early gives you a sense of accomplishment and stability and leads to peace of mind and security. It gives you the sense of owning your home without any debt. Furthermore, it extends the emotional security of having a place to call your own and  free from the uncertainties and risk associated with debt or mortgage payments

Paying Off Home Loan Early Calculator

The mortgage payoff calculator allows you to evaluate how extra payments (Monthly or Bi-weekly) can help you reduce interest payments and shorten mortgage terms. Calculate the monthly interest on your mortgage before considering any option to pay off your mortgage early. 

Strategies To Paying Off Mortgage Early:

People often ask how to pay off a mortgage in 2 years or a 30-year mortgage in 10 years. Different strategies can be followed to eliminate mortgage payments before the decided terms.

Refinance Your Mortgage

Replacing an old mortgage with a new mortgage is called refinancing of a mortgage. It means an existing mortgage is replaced with a new one mainly to lower the interest rate and reduce its term. People who want to revise interest rates, payment schedules, and other terms normally consider refinancing their home loans. Refinancing allows a borrower to get a lower interest rate, move to a fixed interest rate from an adjustable interest rate, and set a shorter loan term. In short, this option allows borrowers to save money on the total interest paid.

Make Extra Payments

The simpler and quicker way to save on interest charges is by making extra loan payments to pay off the mortgage early. One can pay an extra home loan each month or convert to bi-weekly payments. Making lump-sum payments is also possible to reduce loan balances in big chunks. If a borrower is considering this, he must inform his lender that extra payments should only be applied to the principal, not interest; otherwise, he is not going to save anything.

Furthermore, one should strive to prepay the mortgage at the beginning of the loan when interest rate is high. Interest is compounded. It means the larger the loan payment is, the higher the interest rates are. If one prepays home loans in the start, he ends up securing low interest rates.

Pay An Extra Payment Each Year

The most convenient and budget-friendly way is to make an extra mortgage payment each year. You will have to pay 1/12 extra each month to speed up your home loan payments. You just have to add 1/12 additional to your regular payments in order to pay your mortgage early. It does not disturb your regular expenses and financial standing. However, it fosters loan payments.

How To Pay Off Your Mortgage in 5 To 7 Years?

You need to figure out first when you want to get rid of mortgage payments. It will allow you to evaluate how much additional money you need to meet this end. Try to make a higher down payment, which will eventually reduce your mortgage payments. Prefer choosing short-term home loan terms and making frequent or larger payments to pay off your home loan in a decided timeframe.

Consider Dollar-A-Month Plan

A dollar-a-month strategy is a feasible and convenient strategy to foster the process of paying off mortgage payments. Each month, add $1 to your total payment. If you have to pay $900, then pay $901 in the first month and $902 in the second month, and so on. You can reduce the term by eight years if your mortgage payment is %900/ month with a 6% fixed interest rate by following this simple strategy.

Investing In A Brokerage And High Yield Saving Accounts

By investing in a Brokerage or high-yield savings account, you can pay off mortgage payments faster. Take extra payments and invest them to get returns. Create a “Mortgage Payoff Fund” and capitalize on your investments. If you pay extra fees, your returns are generally equivalent to an interest rate, which is quite lower than the return on investment. So, investing in a Brokerage can facilitate early mortgage payments and also give you the flexibility to use this payment for other purposes.

What To Look Out For When Considering It?

Charges And Overpayment Fees

If you want to pay off your mortgage payments early, you need to understand that it is not totally free. You may have to pay early payment fees. Yes, you read it right. One may have to pay early settlement charges in order to repay his home loan earlier than the decided term. In Dubai, it can be 1% of the total amount or AED 10,000, which is exclusive of VAT.

That’s why it is crucial to check terms and conditions related to early mortgage payments. Some lenders require you to pay an overpayment fee, or some may allow you to overpay up to a certain percentage, and if you cross that percentage, then you are bound to pay the required charges. Check mortgage overpayment charges or fees before making a decision.

Save For Emergency

Generally, mortgages do not allow you to get back or re-draw your money from your mortgage payments or overpayments. While overpaying your mortgages,  keep this factor in mind because once it is decided then you cannot stop overpayments. So, make sure you have enough savings for unexpected financial costs or emergencies. You must have an emergency fund, and if you do not have one, create an emergency fund before moving towards overpaying your mortgage payments.

Pay Off Other Debt. If Have Any

People with other outstanding debts should clear them first before considering overpaying mortgage payments. Generally, mortgage payments are quite lower than other types of loans and if you have other outstanding loans then your priority should be getting rid of those loans or expenses at earliest. Once you clear those loans, you can think about paying off your mortgage early.  

Consider Other Investment Options

Your primary goal should not be debt-free but capitalize on your savings or extra cash. Though you can reduce your loan payment through overpayments, your returns will be lower than if you invest your savings or cash somewhere else. You can get better returns by investing. Investment options such as rental real estate start offering returns as soon as you purchase a rental property. Consider the pros and cons of both factors before choosing one.

Summing Up:

Paying your mortgage payments early reduces the incurred burden of a mortgage in the long run, offers equity, and builds cash flow. One way to counter these challenges is an overpayment of the mortgage. Several ways can be used to pay off your mortgage early and get peace of mind. You can pay extra payments, consider refinancing your mortgage, or choose a dollar-a-month method to get rid of long-term mortgage payments.

However, you should be very careful while considering home loan early payment methods. Analyze terms and conditions and create an emergency fund before choosing an option. Additionally, you can invest your savings somewhere else to generate revenue and get maximum advantage of your savings or extra cash.

Get Our Services:

Kelt & Co Realty is a real estate agency that facilitates real estate transactions in Dubai’s property sector. If you want to invest in Dubai’s real estate to start or expand your business or find a place to call your home then Kelt & Co Realty can help you to find the most suitable place to invest. 

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