The recent mortgage turmoil and uncertainty has reduced the market confidence to its lowest levels. People are no longer sure on what to expect from the market further increasing the worries of losing homes. In trying to avert the misfortune of losing a home, people are trying to decide when is it better to finance a mortgage early. A few years ago, the issue of paying mortgage early was highly opposed but as it stands, everyone wants to finance the mortgage at the earliest possible opportunity. When it comes to the early mortgage payment timeline, you should consider various factors.
So, When Its Better Ideas to Pre-Close Your Mortgage?
First, how the alternatives to the mortgage are performing: The nature of humans is to look for the best options that guarantee better returns on the investment. The major alternative markets to mortgage investment include bank savings and stock markets. It is ideal to finance your mortgage early when the returns from these markets are not guaranteed. When the banks are offering low interest rates, it is not ideal to keep the money in the account. Furthermore, it is unwise to invest in stock markets when the returns from these markets are dwindling. On these occasions, it is perfect to finance your mortgage early.
Second, how is your cash flow? To most individuals, the biggest expense is the mortgage payment. Without a mortgage payment, life would be little affected by losing a job or pay cut. If you are uncertain about the future prospects, it is ideal to fund your mortgage early. This would remove your worries about what could happen in-case you lose your job.
Third, how are your retirement plans? Most individuals fear retiring with debts. This is because after retirement, the income is expected to be low. It is therefore ideal to finance your mortgage early to avoid retiring with debt to ensure all your income after retirement caters for a comfortable retirement life.
Still Confused? Here I have done simple calculation based on which you will be able to easily understand whether it is better idea to pay-off your mortgage early or just regular pay installments.
|Your Loan Amount|
|Loan Tenure (Months)||180|
|Interest Rate (Reducing)||6.00%|
|How Much You Pay At the End of 15 Years|
|Calculated Monthly EMI||$843.86|
|Flat Interest Rate PA||3.40%|
|Flat Interest Rate PM||0.29%|
|Interest Amount You Pay Yearly||$3,459.65|
|Total Interest Amount You Pay||$51,894.80|
|Total Amount with Interest||$151,894.80|
Now Take a look at the following table and Decide
|Your Money in Bank (How Much You Earn)|
|Saving Account Balance||$100,000.00|
|Interest You Can Earn (Year)||2.00%|
|Corpus at the End of 15 years with Compounding Interest||$134,586.84|
From the above table, if you have your savings in bank and you are not planning to invest somewhere else, its better to pay-off your mortgage early, because on $100,000 you make a loss of ~$17,000. Thus, it makes sense to utilize your savings.
But if you are planning to invest your money in stock, mutual funds or bonds, then they usually give better returns than bank rates. Do your math and then take decision. You can always take help for CFP (Certified Financial Planner).
If you want us to give you an answer, post a comment with your questions, we’ll be happy to answer.