The Advantages of Paying Off Your House Mortgage
When most home buyers in the United States purchase a home, they make a lump sum down payment of up to 20 percent of the purchase price of the home, and they finance the rest of the amount with a mortgage. Mortgages are usually issued for either 15- or 30-year terms. By paying off the mortgage early, borrowers can reap a number of benefits.
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Interest
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According to michaelbluejay.com, a 30-year fixed rate home loan for $125,000 at six percent interest results in total interest charges of $144,798 over the lifetime of the loan. Homeowners can save tens of thousands of dollars by paying off their mortgage early. According to the same source, initial mortgage payments are composed predominately of interest payments, which add up to big profits for the bank that issued the home loan. When a borrower pays extra every month on a mortgage, this money goes to pay off the principal on the mortgage.
Tax Benefits
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Borrowers overestimate the mortgage interest tax deduction. In reality, most homeowners have to first overcome their standard Internal Revenue Service (IRS) tax deduction. For the 2010 tax year, a married couple receives a standard deduction of $11,400 according to the IRS. Even if taxpayers have plenty of other expenses that allow them to bypass this deduction and they file in the 25 percent tax bracket, they pay $1 in interest to receive 25 cents back in tax money.
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Security
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For most, a house isn't just an investment; it's a primary residence. In the event that the borrower becomes unemployed or disabled, he will still have to make monthly payments on the mortgage. By paying off his mortgage early, the homeowner can ensure that he will not lose the home, as long as he pays annual property taxes.
PMI
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Banks will require a mortgagee who make less than a 20 percent down payment on her home to acquire private mortgage insurance (PMI). PMI compensates the lender in the event that the borrower does not make her monthly mortgage payments. According to Michael Bluejay, a homeowner who buys a $100,000 home and puts five percent down will pay PMI on $95,000. A bank will charge $63 a month on average for PMI on this home loan. A borrower no longer pays PMI when she has 20 percent equity in her home, which means that paying extra on a mortgage can add up to big savings.
Warning
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Early mortgage payments do not suit all homeowners. Extra payments on a mortgage will not lower a loan holder's monthly payments, so homeowners should keep an emergency fund in case they become unemployed. In addition, some banks charge prepayment penalties if a borrower pays off the mortgage too soon.
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