2 Tips for Paying Off Your Mortgage Early

Paying off your mortgage can take many years. Depending on the terms of your mortgage, your payments may change over time, placing you under additional financial stress. With the economy being the way it is, nobody would blame you for wanting to pay off your mortgage as soon as humanly possible. However, repaying it early will not necessarily solve your problems. In fact, there are many ways in which paying off your mortgage early can backfire, leaving you with more debt than before. So, if you want to pay off your mortgage early, there are several things that you will need to do.

Understanding Mortgage Repayments

Buying a house it's cheap. Unless you are very rich, you will not be able to afford to buy a house out of your own pocket. This is why most home buyers take out mortgages. By taking out a mortgage, you borrow the necessary funds from the mortgage lender. Because you obviously can't repay everything at once (if you did, you wouldn't need to borrow money in the first place), the lender allows you to pay it off in much smaller monthly installments. Those installments are known as principle payments. Their value depends on how much the mortgage is worth and how long you have to repay it. Generally speaking, the longer you have to repay it, the smaller the principle payments will be.

In addition to principle, the mortgage lender charges interest. Interest is essentially a fee the lender charges for maintaining your loan and keeping all the paperwork in order. Aside from the fees you pay when you take out the loan, interest payments are the only way mortgage lenders earn profit off your mortgage. The interest can be either fixed or variable. If it's fixed, it remains the same for the duration of the repayment period. If the interest is variable, it changes over time depending on the market conditions.

1. Don't Pay Off Your Mortgage all at Once

Suppose you won a lottery, got an inheritance or found some other way to get your hands on a sum of money large enough to pay off all your your remaining principle. You may assume that you will be able to pay it off all at once. However, mortgage loan contracts usually have clauses that impose financial penalties against this sort of thing. That's because, if you pay it all at once, you would only have to make one interest payment, and the mortgage lender will lose years worth of profit.

This is why you should talk to your mortgage lender before you start paying off your mortgage earlier. You will have to negotiate on the reduced mortgage repayment term that's acceptable to both of you and make the repayments accordingly.

2. Make Sure You can Afford Paying Off Your Mortgage Early

As mentioned above, the longer you have to pay off your mortgage, the smaller your principle payments will be. Therefore, once you agree to repay your mortgage earlier, your monthly payments will increase, something which you may not necessarily be able to afford. You can avoid this problem by looking at your monthly expenses and financial obligations, adding them together, subtracting them from your monthly earnings and see how much you have left over. If that number exceeds the extra money you'll have to pay when you agree to pay of your mortgage early, you can proceed. If the number is equal, you should hold off; after all, you never know when you might need the extra money.

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