Signing the paperwork on a 30-year mortgage doesn’t necessarily mean that you’ll be writing a monthly check for three decades. Whether you refinance into a shorter-term loan or simply have the cash to pay out-of-pocket, you may opt to pay off your mortgage early to eliminate the concern of paying a monthly mortgage, to reduce debt or eliminate your mortgage before retirement, or simply because you can. Here’s what you need to know before you do.
Explore your options. With today’s low interest rates, many qualified borrowers are opting to refinance their loans to shorter terms. Depending on the principal balances and interest rates, a loan term may be reduced by several years. For example, a borrower with 20 years remaining on a loan may refinance into a 15-year term while maintaining a similar monthly payment. Some borrowers may opt to pay off their loans with personal savings. However, even paying slightly more on a principal balance or one extra payment per year can reduce a loan term significantly and save on interest expenses. Bankrate.com has a calculator that illustrates this principal and allows you to compare amortization charts. In addition, the Mortgage Bankers Association has a calculator that can help you see how additional principal payments can shorten your loan term.
Pay off higher interest rate debt first. It’s usually not a good idea to pay off your mortgage balance if you’re carrying credit card balances, automobile or personal loans, or other forms of high-interest debt. Before reducing your mortgage principal, devote money to paying off debt that has high interest rates and doesn’t offer you tax advantages, such as the mortgage interest deduction.
Consider your cash needs. Once you’ve paid off high-interest consumer debt, look at your available cash and investments. Do you have an emergency fund that could cover at least three to six months of your monthly expenses if necessary? Are you properly funding your retirement accounts or saving for other priorities like children’s education costs? If not, consider whether the funds you put toward early mortgage payoff could be used in other ways for added financial security.
Check with your tax advisor. If you itemize your taxes, the mortgage interest deduction you enjoy might make keeping your loan worthwhile. Much will depend on your taxable income and the amount of interest you pay every month. The older your loan, the more of the payment is applied to principal, so the tax advantage of writing off mortgage interest decreases. Consult with your tax advisor to determine the tax implications of paying off your mortgage early.
When You’re Ready to Pay It Off
If you’ve decided that early mortgage payoff is the right move for you, be aware of some best practices in doing so.
Consult your financial advisor. Your advisor can help you explore your options when it comes to paying off your mortgage early, including arranging refinancing or determining the best way to pay down principal over time. Don’t fall for third-party firms offering to show you how to make biweekly payments or handle your payments themselves to pay your mortgage off early. These are often scams, and your lender can help you do this free of charge.
Get the payoff amount. Before you send in that final check to pay off your loan, be sure you contact your lender for the exact payoff amount. This payoff amount will typically include at least 10 additional days of interest and a date through which the payoff amount is sufficient. Be sure to allow enough time for the payment to be received so that it falls within the period for which the interest was projected.
Follow through. Once your mortgage is paid off, you’ll receive a letter from your bank notifying you that the loan has been satisfied. After that, the bank will release the deed on the property, which will be cleared with the local county tax assessor’s office, then returned to the homeowner. Once you receive this deed, keep it in a fire-proof safe or safe deposit box — it is your proof of homeownership. You’ll still need to make property tax, hazard insurance and, if applicable, homeowners association payments, but the days of writing out a check to your mortgage lender will be over.
Paying off a mortgage early isn’t the right move for everyone, but it can make sense for some. Be sure to get good advice from your financial and tax advisors and work with them to make a payoff plan that works for you.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
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