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Old wisdom says to spend between 28% and 35% of your income on your mortgage. As you probably know, this is a substantial portion of one’s budget. When combined with the groceries, the insurance premiums, the car payments, and the other necessities of life, it leaves very little left over to save or spend on recreation.
As such, some individuals try to pay off their mortgages as quickly as possible. Wondering whether you should be one of these individuals? Then read on because we’re going to discuss 6 benefits of paying off mortgage early.
1. Free Up Your Budget for Other Uses
One of the biggest benefits of paying your mortgage off early is that it frees up your budget for other uses. After all, once it’s paid off, you could be saving anywhere from several hundred to several thousands of dollars every month.
Over the span of a year, this could turn out to be anywhere from $6,000 to $24,000, and maybe even more, all of which can be put toward other purchases.
Wanting to remodel your home? This money will allow you to do so.
Hoping to aggressively stock your retirement funds? This money will make that possible.
Or maybe you want to spend it on fun and luxury as a reward for decades of hard work? There’s nothing wrong with that. This money will put you in a position to do so.
2. Reduce Interest Paid
Paying your mortgage off early not only frees up your budget but it also reduces the total cost that you have to pay over the long-run. Why is this? Because it reduces the amount of interest you have to pay.
To illustrate this point, we’re going to use an example. Let’s say your mortgage is for a $250,000 house and possesses an interest rate of 4.5%.
If you were to pay this off over the standard 30 years, you would end up paying $456,015.60 in combined interest and principal. However, if you were to pay it off over 22 years instead, you would only end up paying $394,276.08 in combined interest and principal. In other words, you would save over $60,000 in total.
You can use a mortgage guides calculator to assess your particular situation. But regardless of what the case may be, if you pay your mortgage off early, you will end up saving money.
3. Get Rid of Private Mortgage Insurance
If you’re still in the early days of your mortgage, and if you paid less than 20% down, there’s another cost-saving benefit to paying off early: the elimination of private mortgage insurance or PMI.
PMI is attached to any mortgage that was not accompanied by a 20% or greater downpayment. Generally comprising 0.5% to 1% of the total mortgage amount on a yearly basis, it must be paid until you have 20% equity in the home. As such, the faster you pay off your mortgage, the fewer the months you’ll have to pay PMI.
Let’s say that the total cost of your mortgage is $300,000. With a private mortgage insurance rate of 0.5%, you’ll owe PMI of $1,500 annually. Spread out over the course of 12 months, this comes out to $125 a month.
This $125 a month will stick around until you’ve paid off 20% of your total mortgage. However, once that 20% has been paid, you’ll have $125 freed up every month. You can use this money to buy groceries, go on trips, fund your retirement account, and do a variety of other things.
4. Receive Home Equity Loans
Another benefit of paying your mortgage off early is that it puts you in a position to obtain home equity loans. Home equity loans are loans that allow you to put equity in your home up as collateral. As such, they come with exceedingly low-interest rates (as low at 3.79%).
These loans can be used for everything. However, they’re most typically used for a few select purposes, including emergency expenses, home improvement projects, debt consolidation, and real estate investment.
You can generally obtain a home equity loan of up to 90% of your home’s value. However, you can only borrow as much as what you’ve paid. So, by paying off your mortgage more quickly, you can more quickly access home equity loan funds.
5. Obtain Financial Security
One of the biggest benefits of paying your mortgage off early is that it provides you with financial security. Of course, this isn’t to say that it’s going to get you through retirement.
However, a house owned in full is a sizeable asset. Should you ever come on hard times, you could sell it for a substantial amount of money in order to keep yourself on your feet.
Plus, without a mortgage to pay every month, you can contribute much more of your money toward savings and retirement accounts. As was noted above, hundreds to thousands of dollars could be saved monthly.
Of course, you could also save money over the years as you’re paying off your mortgage. However, as was noted above, in doing so, you could lose out on tens of thousands of dollars worth of interest payments.
6. Peace of Mind
No one likes being debt, even if that debt is beneficial. This is true whether it’s a personal loan, credit card debt, or a mortgage. Owing money causes stress and stress adversely affects one’s quality of life.
This is why, for many, paying a mortgage off early is the right choice. Not only does it offer the tangible financial benefits reviewed above, but it also offers peace of mind.
The Benefits of Paying Off Mortgage Early are Substantial
As you can see, the benefits of paying off mortgage early are substantial. Not only does it free up your budget but it also saves you from mountains of interest.
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