By Karl Thompson
A home loan is the biggest debt that most people carry. With average mortgage terms spanning 20 to 30 years, you’ll be paying on your home for decades. You can check out your payoff terms by using a calculator at one of the many financial information websites. By paying off your home loan early, you can work toward other financial goals and have an asset in your name that you completely own.
Save on Interest
The real estate market has been unstable since the market crash in 2007. The resulting shock waves have made it harder for homeowners to get new loans with better terms. Refinancing a current loan to get lower rates has become much more difficult now than it was in the past. Since property values have declined, your home may be worth less than what you paid for it and a lower property value hurts your chances at refinance.
If you can’t refinance for a lower rate, you’re stuck with payments calculated at your current rate. The longer you have to pay, the more in interest you’ll lose. Paying off the loan early will save you interest, with the savings depending on your interest rate and total loan balance. Use your savings to build other investments and income opportunities. For example, you could put the extra money into a savings account and earn interest on it.
By freeing up money you’d otherwise be giving to a lender, you can save without seeing a difference in your budget. If your loan payment was $500 each month, for example, you could deposit that $500 into a savings account after you’ve paid off your mortgage and your budget would remain the same.
Warnings: Check your loan documents carefully. You might have a prepayment penalty that will outweigh or seriously impact your savings if you pay the loan early. A prepayment penalty is an amount you agreed to pay to the lender if you paid off your loan before its term ended. Prepayment amounts vary by lender. Some prepayment penalties decrease over the loan’s term. For example, the penalty if you pay off your loan after five years might be lower than the penalty for paying during the first four years. Calculate your prepayment penalty before you pay the loan off so you don’t get hit with a surprise bill. Speak to your lender if you need help in estimating your penalty.
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