For example, if you want to retire earlier than expected then you don't want a mortgage in your retirement years. However, paying off your mortgage early, no matter how you choose to do it, ties up a significant amount of liquidity that you could use to invest and build more wealth, or save for unexpected hard times.
He goes on to say: “Paying off your mortgage early seems impossible but it is completely doable and people do it all the time, but how can you do it and why would you want to put in the extra effort? Paying off your mortgage early will rev up your wealth building.”
Get in touch with your accountant
After paying off your mortgage, you should notify your accountant. You'll no longer have mortgage interest to deduct on your tax return, which could potentially increase your tax liability. However, paying off your mortgage might also free up cash that you can use for other purposes.
The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.
Timing Requirements – The “3/7/3 Rule”
The initial Truth in Lending Statement must be delivered to the consumer within 3 business days of the receipt of the loan application by the lender. The TILA statement is presumed to be delivered to the consumer 3 business days after it is mailed.
If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.
Peace of mind, saving on interest and building equity are three benefits of paying off your mortgage. Downsides include opportunity cost, reduced liquidity and removing a major tax deduction. A financial professional can advise you on the most appropriate options for your financial situation.
Let's start with a basic fact: Whether you carry a mortgage on your property has no impact on what you pay in real estate taxes. Your real estate taxes should be based on the actual value of the home or what your local taxing authority believes your home is worth.
One of the most significant benefits of paying off your mortgage is the peace of mind that comes with owning your home outright. Without a mortgage, you don't have to worry about monthly payments, which can be especially comforting in retirement or during economic downturns.
When You're Nearing Retirement: Orman has consistently recommended that homeowners aim to have their mortgage paid off by the time they retire.
Paying off your mortgage early frees up that future money for other uses. Your mortgage rate is higher than the rate of risk-free returns: Paying off a debt that charges interest can be like earning a risk-free return equivalent to that interest rate.
In fact, the average millionaire pays off their house in just 10.2 years. But even though you're dead set on ditching your mortgage ahead of schedule, you probably have one major question on your mind: How do I pay off my mortgage faster?
There is no specific age to pay off your mortgage, but a common rule of thumb is to be debt-free by your early to mid-60s. It may make sense to do so if you're retiring within the next few years and have the cash to pay off your mortgage, particularly if your money is in a low-interest savings account.
Put simply, you will save significant amounts in interest. Most mortgage contracts allow borrowers to make extra payments, and they allow all of the extra money to be applied to the principal amount of your loan. That means you are paying down the real amount of the loan – the money you borrowed – faster.
Once you pay off your mortgage, the mortgage lender — also referred to as the “trustee” — creates the deed of reconveyance. The lender then signs this document and has it notarized. Typically, the document must be provided to you within 30 to 60 days of your final payment, says Hernandez.
Homeowners insurance protected the bank's financial interest in your property, as well as your own. But now that your loan is paid off, you are responsible for making your homeowners insurance payments.
Once your mortgage is paid off, it's important to reassess your budget and financial goals. You can use the additional funds to make home improvements, start saving for a child's college fund or invest in the stock market. Leaman says people have many options to consider once they no longer have a mortgage payment.
Once mortgage payoff funds are posted, money held in escrow with your current lender will be returned to you from that lender. The existing escrow account cannot be transferred unless your current lender is the same as your new lender, in which case your payoff will be reduced by your current escrow balance.
You may not want to pay off your mortgage early if you have other debts to manage. Credit cards, personal loans and other types of debt usually carry higher interest rates than your mortgage interest rate. Remember, the higher the interest rates, the faster your accounts accrue debt.
As a general rule, paying down your mortgage may cause your tax liability to go up, since you will be paying less deductible mortgage interest (which of course, is not a bad thing!) However, if you are not itemizing your deductions but are instead taking the Standard Deduction, then it will have no effect.
You decide to increase your monthly payment by $1,000. With that additional principal payment every month, you could pay off your home nearly 16 years faster and save almost $156,000 in interest.
Ideally, you want your extra payments to go towards the principal amount. However, many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month's payment.
By paying more than your required monthly mortgage payment, you can put that extra money directly toward the principal amount on your loan. Your interest payment is based on your principal balance, so by applying your extra payment to your principal, you could pay less in interest over time.