Paying down your mortgage faster is not a new maths. But, you may be surprised at how effective and powerful it is. In this blog, we are going to tell you how paying the debts faster can save you hundreds of dollars.
This is not for everybody:
Paying debt faster is only for the people whose cash flow is running in a positive direction. It’s not for people who are struggling to pay their personal expenses.
If you believe you can earn 8% to 10% annually with other investment strategies, you are not going to be very excited about the idea of expending cash to earn 4% (or whatever your exact home mortgage interest may be) by paying off your mortgage early.
Pay off mortgage early or invest?
A homeowner, just realized that he would get an additional $24,000 a year after tax. They plan to stay at this job, and likely to build the asset column. They have an established emergency fund, no debt, and already maxing out their 40K and IRA. They plan to stay at home forever and retire at 15 years at 65.
Their initial mortgage balance is $500,000 on a 30 year fixed rate loan with an interest rate of 5.84%. They are 15 years into their mortgage and have a remaining balance of $282,221.
If they refinance to a 15 year fixed mortgage, their interest rate would be 31.9%. Refinancing costs are an estimated $60,000 for simplicity. Generally, refinancing cost runs between 1.5% to 4% of the remaining mortgage loan.
Invest more aggressively:
If the home buyer refinances their mortgage and invests what they save on monthly payments, plus $24,000 a year, 15 years they would have paid off their mortgage and have an investment account balance of $623,47.
If the home buyer doesn’t refinance their mortgage and invest the $24,000 a year, in 15 years, they would have paid off their mortgage and have an investment account balance of $533,099.
Pay more aggressively:
If the homebuyer refinances their mortgage and invests what they save on monthly payment, plus $24,000 a year, in 15 years they would be paid off their mortgage and have an investment account balance of $623,701.
If the homebuyer doesn’t refinance their mortgage and invests what they save on monthly payment, plus $24,000 a year, in 15 years they would be paid off their mortgage and have an investment account balance of $570,449. You can ask any mortgage lender, and he will suggest you to pay off the loan faster if you want to decrease your current interest rates.
How will you use the money if you don’t pay off your mortgage early?
Next, be realistic about what you would like to do with your money if you don’t want to pay off your mortgage early. Invest this money in the investment classes like the stock market, insurance plans, mutual funds and bonds. Keeping money in an idle position is not the right way to handle money. Sometimes, taking a risk and investing in the investment options will give you a better return of the investment. When you get a higher return from the investment, you can use this money to pay off the mortgage loan because making extra mortgage payments can save thousands of dollars in interest over time, plus help you build equity the home faster.
We hope this comprehensive guide on paying off the mortgage loan faster will help you a lot. If you are financially stable and not having any pending bills and debts, then it is advisable to pay off the mortgage loan faster because it saves you thousands of dollars and the current mortgage rates.