Your home mortgage is probably your single largest monthly expenditure. Most people look at that payment as a fact of life — you need a place to live, after all. Have you ever considered, however, paying off your home loan? Most home mortgage plans allow for prepayment, and there are many good reasons to do so. Here are five of them.
Equity is the worth of your home less any money owed on its mortgage. The more principal — the original loan amount — that is paid down, the more money in your pocket should you sell the house. When a loan payment is calculated, the principal, the interest rate and the length of the loan are all used to determine the monthly payment. Early on, very little of that payment goes toward principal; most of it is interest. If, however, you send in more money than is required, it will be subtracted from the principal. That means, should you ever sell the house, you will owe less on the loan and more of the money will be yours to keep.
Huge savings on interest
Most people don’t consider interest when they are buying a home; they simply look at the purchase price. Consider this, however. If you were to take out a loan to purchase a $100,000 home at six percent and then took the full thirty years to repay that loan, you would have a monthly payment of about $600 and would end up spending over $215,000. That’s more than double your home’s original price. If, however, you paid the same loan off in 15 years, your monthly payments would only increase by about $250, and you would end up paying only around $151,000.That is more than $60,000 saved over the life of the loan; almost enough to buy another house!
Free up cash for other investments
If you were able to pay off your mortgage, you would have extra cash every month. You could use that extra money for investments. Instead of paying interest to someone else, your money would be working for you. The extra cash would also be available for other needs — a car, your children’s education, retirement, home repairs. This would save you even more money. You would not have to go into debt — and pay more interest — for all those things.
Protection from foreclosure
Life is unpredictable. We never know when an illness or unemployment might strike. A paid-for home is the best insurance against the unexpected. While you looked for a new job or focused on regaining your health, you would have the peace of mind of knowing you had a place to live, and no bank could foreclose on it for missed mortgage payments.
Owning your home free and clear has many benefits, and one of them, ironically, is having the option of re-mortgaging it. If you ever had a pressing emergency and needed a large amount of cash, you could always use your paid-for home as collateral to get a new loan from the bank. It might be hard to face those monthly payments again, but if the need was great, it would be worth it.
Keep in mind that the quicker you pay off your mortgage, the higher all these benefits will be. But, even adding a little extra to your mortgage payment each month increases your equity and decreases your interest. Whatever extra amount you can add today will reap financial benefits tomorrow.