What Are the Benefits of Paying a Mortgage Early?
Many mortgage borrowers pay their mortgage on time each month, paying exactly the amount owed. However, they fail to gain all of the benefits of paying a mortgage early or making extra monthly payments. While in the short run the extra payments may hurt the budget a little bit, in the long run the payoff can be in the tens of thousands of dollars in saved interest.
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Reduced Term
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First and foremost, additional monthly payments or principle reduction payments on your monthly mortgage will reduce the length of your loan as a whole. For example, if you have a 30-year fixed-rate mortgage and make one additional monthly payment per year, each year over the life of the debt, you reduce its length by 7 years. Additionally, if you make two extra payments per year, you cut the length of the loan almost in half.
Reduced Interest
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As a result of the reduced term of the mortgage, additional payments cause a great reduction in total interest paid on the debt over the life of the loan. The monthly interest paid is based upon the principle balance of the loan; therefore, the lower the balance the less interest expense per month. For example, if you have a 30-year fixed mortgage at 5 percent on a $100,000 note, you will save $17,178.29 in interest by making one extra payment per year over the life of the loan.
Increased Equity
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The goal of any homeowner is to own his home free and clear, meaning that there are no liens or debts on the residence. You can get to this goal quicker by increasing your monthly payment on your mortgage. Additionally, you will be increasing your equity faster in your home by reducing the principle on your mortgage faster. This can mean a greater profit on the home if it is sold before the mortgage is paid in full, as well as the ability to get a larger home equity line of credit on the residence, if you need it.
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References
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