Home > Mortgage Loans > Save A Fortune In Interest By Paying Off A Mortgage Early
Save A Fortune In Interest By Paying Off A Mortgage Early |
|
Owning your own home is incomparable for almost anyone who has taken a mortgage. Paying off mortgage can be a noble goal serving you well in retirement. But there's no rush either.
The Interest Paradox Though interest on a shorter mortgage is far less than on a longer one, it doesn't mean paying off mortgage faster can save as much as expected. Most of the interest is paid in the early years. When amoritizing a loan over 30 years, the first 10% of principal takes 8 years to pay down. The rest is interest. When halfway through a 30-year mortgage, 67% of interest has been paid. In the 20th year, or two-thirds of the mortgage, 84% of interest has been paid. Accelerating payments halfway through a 30 year mortgage saves very little in interest. It's better to put the extra payments into a money market account, until actually due. The bank pays your interest instead. Unfortunately even working it out right to save thousands in interest, it could cost you more in lost opportunity. Focus instead on what the best use for your money is. Get a Cheaper Standard Variable Rate by Paying Early There are two common reasons for paying off a mortgage early. First, for a safety net in case of job loss and to reduce income needs in retirement. Without a doubt the prospect of losing your home over missed mortgage payments is unsettling. The prospect of using most of your retirement income to a monthly mortgage is no better. Instead investing may make more sense. Investing leads to a portfolio of securities with easy convertibility to cash. Cash can make a lot of mortgage payments if you're collecting unemployment. Cash also makes car payments and groceries. If your house was paid for, a new mortgage can always be taken for more cash except if you're out of work. Timing is unfavorable. Even if you get a mortgage it will not be very big with rates less than favorable. For a decent mortgage loan, more than a lot of equity in your home is needed. Regular income is a must making home ownership a lot less useful for emergencies than it appears. Mortgages mostly revert to these rates with expiry of discounted or fixed period. Like mortgages in general, they vary from lender to lender making it advisable to shop around. Imagine an anti-mortgage account for which instead of extra payment to your lender every month, you make them to a broad-market index fund. The anti-mortgage account offers options like cashing it in to pay off mortgage early if desired. Or keep saving to build up net worth while paying down mortgage. Or again, choose any of the endless possibilities that requires cash. Here's an Even Better Idea Use earnings from investments for mortgage payments. When an anti-mortgage account becomes sufficient to pay off mortgage at one time, use the earnings from the account for monthly payments and keep the cash. Cash out your anti-mortgage account and pay off mortgage. Or else keep your money in the index fund, withdrawing enough every year for mortgage payments. |
|
| ------------------------ |
|---|
|
|
| ------------------------ |
|---|
|
|
|
|
| ------------------------ |
|---|
|
| ------------------------ |
|---|
Custom Search
|
| ------------------------ |
|---|
|
|
| ------------------------ |
|---|
Consumer Alerts | About | Bookmark Us | Contact | Espanol | Privacy Statement | Copyright | Terms & Conditions | Financial Widgets | SiteMap
Copyright © 2006 Credit Loan, LLC. 235 APOLLO BEACH BLVD, STE 218 Apollo Beach, Florida 33572 All rights reserved.
Disclaimer: The content provided on CreditLoan.com is for informational purposes only; do not make any financial decisions based on its content. Financial decisions are personal, based on an individual's situation. Consult with a financial professional before making any financial decisions. CreditLoan.com is not liable for your financial actions.
