If you find yourself with extra money from a salary increase, bonus or unexpected windfall, you may be considering paying off your mortgage early.
Paying off your mortgage before the end of the agreed-upon loan term can save you money on interest and open up considerable space in your budget.
Moreover, owning your home outright will allow you to tap into that equity in the future and provide you peace of mind.
Read on to learn more about the pros and cons of paying your mortgage off early and how it can benefit your personal finances.
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Should you pay off your mortgage early?
Depending on the size of your home loan, you could potentially save thousands of dollars in interest by paying off your mortgage early. Should you decide to do this, it’s advisable that you keep cash reserves to cover other day-to-day expenses and potential emergency repairs.
Based on calculations using our mortgage payment calculator, if you had a 30-year, $300,000 mortgage with a 4% interest rate and put 20% down, your minimum monthly payment — not including property taxes — would be around $1,146.
In this scenario, you would pay $172,487 in interest over the life of the loan.
Say you increase your monthly payments to around $500. This would allow you to pay off your mortgage in 20 years instead of 30. In this case, you would pay a total of $109,045 in interest overall, saving $63,442. Plus, there’s the added benefit of getting out of debt a full decade earlier than anticipated. Of course, the results of this calculation will depend on your current mortgage balance.
The majority of fixed-rate loans are amortized. Amortization refers to the process by which you gradually pay off a loan. At first, the majority of your monthly mortgage payments go toward the interest, and anything left over goes toward the principal loan balance. As your balance decreases, monthly payments shift to primarily go toward the principal.
Pay off your mortgage early — Pros and cons
- No more monthly mortgage payments
- The property will belong to you 100%
- Extra cash flow