Mistakes To Avoid When Paying Off Your Mortgage Early
If you can afford to pay off your mortgage ahead of schedule, youll save some money on your loans interest. In fact, getting rid of your home loan just one or two years early could potentially save you hundreds or even thousands of dollars. But if youre planning to take that approach, youll need to consider if theres a prepayment penalty, among other possible issues. Below are five mistakes that you should avoid when paying your mortgage off early. A financial advisor can help you figure out your mortgage needs and goals.
What Documents Can You Expect
The documents you receive may depend on your loan servicer. Heres what you can expect, which documents are essential and which ones you can make do without.
If you dont have proof within about 90 days that the certificate of satisfaction has been recorded, you may need to contact your loan servicer and speak with the lien release department.
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Pay Off The Mortgage First
Reason No. 1: Save money
Every loan comes in two parts: the principal and the interest.
The principal is the amount you want to borrow. For instance, if you have $100,000 saved but you want to pay a $550,000 home, you will need to borrow $450,000 in order to complete the transaction. That $450,000 in the principalthe money youve actually borrowed.
The interest is the fee you pay in order to borrow the money. Its the cost of using someone elses money to buy an asset.
In Canada , its standard to amortize a mortgage loan. All this means is that the loan repayment is scheduled equally over a set period of time. This enables the lender to calculate the expected earnings of their risk , as well as establish a timeline for when the loan will be repaid in full.
The easiest way to save money, when it comes to mortgage debt, is to reduce the amount of time it takes to repay the principal debt. For example, if you borrowed $450,000 and the amortization schedule was for 25 years with an interest rate of 3%, you would actually pay just a little under $639,000 back to the lender . In other words, you paid the lender close to $190,000 in interest on a $450,000 loan. Reduce the amortization of that loan to just 15 years and you shave $80,000 off the interest payments you make to the lender.
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Reason No. 2: Financial freedom
Consider A Mortgage Recast
Instead of using extra or biweekly payments to chip away at your loan, you can make a lump sum payment to help you pay off your mortgage faster. This method is known as a mortgage recast.
Once you pay the lump sum toward your principal, your lender recalculates your mortgage to reflect the payment. Although your term and interest rate remain the same, your monthly payments and the amount of interest you have to pay on the remaining balance of your loan is reduced.
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You Can Give It As Part Of An Inheritance
Paying off your home can also be part of your legacy. You may choose to leave it to a family member in your will.
Or you may move somewhere else but give the home as a gift to someone. Giving someone a home with no mortgage is a wonderful thing.
They can have a place to live without cost or sell it for much more than you bought it for initially. You can build generational wealth in this way and also know that your mortgage payoff will continue to help your family for a long time.
Tips To Pay Off Your Mortgage
Maybe you are reading all of this and thinking that paying off your mortgage is very far away for you. Perhaps you just bought a home, refinanced, or are not a homeowner yet.
Dont worry! You can pay off your mortgage, and you may even be able to do it in less time than youd think. Here are some ideas for paying off your mortgage.
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Can You Sell Your House Before Paying Off The Mortgage
Most home loans have a repayment period of either 15 or 30 years. So what happens if you want to sell before then or before youve paid off your loan? The typical seller lives in their home for 13 years before selling, according to the Zillow Group Consumer Housing Trends Report 2018, so selling while you still have a balance on your mortgage is actually quite common.
As long as your home is worth more than what you owe the bank, youll probably pocket some profit after youre done paying commissions, fees and closing costs.
How Do I Get My Escrow Refund
If theres money left in your escrow account after youve paid off your mortgage and/or you overpaid the loan , the extra money will be sent back to you.
If youre refinancing with Rocket Mortgage®, we may net your escrow. This means well take whatever money is left in your escrow account and apply it toward your payoff amount.
Again, this will depend on your loan type. On FHA mortgages, the lender cant net the escrow account, so you would receive an escrow refund check from your old loan instead of having the balance applied to your new principal. Read the fine print on your loan to understand what happens when you pay off your mortgage.
Sometimes the lender must hold money in your escrow account after your loan has been paid off. This is because mortgage insurance is paid in arrears, meaning its paid at the end of the period youre paying for instead of upfront. Your lender may hold on to some of your escrow funds to cover those last costs if you have mortgage insurance.
If you are due an escrow refund on your Rocket Mortgage® mortgage, well process it within 10 12 business days from when we receive the payoff. You can choose to have it sent as a check or deposited directly into your bank account.
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How Do I Get My Title After Paying Off My Mortgage
First of all, theres a house deed and a title. They are different things, and it can be very confusing.
A title isnt a real piece of paper but the principle of owning your home legally. A deed, on the other hand, is the actual paper that proves you own the home.
When you pay off your mortgage, you need to acquire the deed to your home. This proves that you own it.
Since the mortgage lender is the one who holds onto the deed, they should release that to you when you pay off your mortgage. If not, you may need to contact the lender to get the deed.
Is It Better To Pay Off Your Mortgage Before Selling
Paying off your mortgage early, before selling, might seem like a good way to avoid mortgage payment confusion, assuming you have enough cash. However, theres limited benefit to paying the mortgage in full before selling. Yes, it would allow you to offer seller financing to a buyer, but it also may set you up to owe more at closing. Why? Because you could be subject to a prepayment penalty, depending on the terms of your loan.
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What Happens After I Pay Off My Mortgage
After your mortgage has been paid off, it must be recorded with the county by sending whats called the Discharge of Mortgage document. Your lender is required to write up the document, but what happens next is up to local regulations.
Some states require the lender to send the document to you, while others require the lender to send it to the county. Regardless, the burden is on the lender to draw up the document, but its on you to make sure its sent to your countys Registry of Deeds.
Contact your lender to find out what your state requires for the Discharge of Mortgage and to get answers to other questions about your loan.
What Does It Mean To Pay Off Your Mortgage Early
Many homeowners would love to fast forward to when they own their houses outright and no longer have to worry about monthly mortgage payments. As a result, the idea of paying off their mortgage early could be worth exploring for some people. This will allow you to lessen the amount of interest youll pay over the term of your loan, all while giving you the ability to become the homes full owner earlier than expected.
There are a few different methods by which you can go about paying early. The simplest method is just to make extra payments outside of your normal monthly payments. Provided this route doesnt result in extra fees from your lender, you can send 13 checks each year instead of 12 . You can also increase your monthly payment. By paying more each month, youll pay off the entirety of the loan earlier than the scheduled time.
If youre considering paying off your mortgage ahead of time, make sure you avoid these five critical mistakes.
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How To Pay Off Your Mortgage Early
If paying off your mortgage early is right for you, here are some strategies to do it:
- Make biweekly payments. One way to get started with making extra mortgage payments is to set up a biweekly schedule. This amounts to making a full extra monthly payment each year and can reduce the time spent with a mortgage. Starting with biweekly payments can help you get ahead on your mortgage while allowing you to keep working toward other financial goals.
- Make extra mortgage payments each year. Similar to making biweekly payments, you can simply make an extra mortgage payment once a year, or pay an additional amount each month on top of what you already pay. Be sure to coordinate with your lender so that these extra funds are allocated to the principal.
- Refinance to a mortgage with a shorter term. If you stand to get a lower interest rate, refinancing to a 15-year mortgage means youll pay off the loan sooner. Keep in mind that even with a lower rate, you could be paying more each month, since your payments are now spread out over a shorter period of time.
What To Do With The Windfall
Once you pay off your mortgage, youll find yourself with some extra cash on hand. Some ways to purpose this might include repaying any high-interest debt, such as credit card balances, or boosting your retirement savings. In 2021 you can contribute up to $19,500 to your 401 and up to $6,000 to your Roth IRA. If youre aged 50 or older, you can also make catch-up contributions: $6,500 to your 401 and $1,000 to your Roth IRA.
You may also want to consider adding more to your emergency fund. Experts recommend keeping between three to six months of cash on hand for unexpected expenses.
Whatever use you find for your freed-up cash, keep in mind that your credit score may suffer a dent once you repay your mortgage, especially if it was the only installment debt you carried. In some cases your score can improve, depending on what other kinds of credit youve borrowed and how youre utilizing it, and whether or not you have a history of late payments.
How Will You Use The Money If You Dont Pay Off Your Mortgage Early
Be realistic about what youre likely to do with your money if you dont use it to pay off your mortgage early. After the mortgage is paid off, will you actually use it to get ahead?
It might make sense, for example, to put the money into paying off your mortgage early if you struggle with keeping money in the bank. Your home can be a forced-savings tool, and making extra mortgage payments can save you thousands of dollars in interest over time, plus help you build equity in your home faster.
The right thing to do is the thing you will do, Bowen says. All of this has to do with personal habits. If youre going to blow through the extra money anyway, then its better that you put it into your house than spend it.
Give Money To A Charity
Is there a charitable organization that you care about? Whether it helps the environment or funds medical research, there are a lot of charities to choose from.
Now that you dont have to make a house payment, you can give back freely to your community and the world.
Try checking out a few charities and finding one you like, or give funds to several at once. You can afford to do a lot more than before, and helping others is a great feeling.
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Max Out Your Retirement Contribution
This should be easy to do with no mortgage to pay for, and it may not even take all the money youd usually pay.
The easiest way to do this is to set aside the money you would have used each month for your mortgage and add it straight to your retirement account until you hit your max contribution for the year.
Maxing out your retirement contribution is a fantastic way to set yourself up for the future. The perfect way to celebrate paying off a house is by giving yourself the max amount of money to work with when you hit your golden years.
How Bitcoins Volatility Complicates Matters
Beyond the logistical details, Bitcoin is volatile. Last year, in October 2020, Bitcoin was valued at $ 11,471, according to Coindesks Bitcoin tracker. Most recently, it hit a new all-time high of over $ 66,000.
While Bitcoin has risen significantly in value over its 11 year history, its value varies considerably from day to day. This volatility poses a huge risk if youre looking to make regular monthly payments, says Jeanne Fisher, a certified financial planner based in Nashville. Given the volatility with Bitcoin, paying a mortgage payment of $ 1,000 could require dramatically different amounts of Bitcoin on a monthly basis.
Heres a look at how Bitcoins value has fluctuated over the past year:
Bitcoin was valued at US $ 66,974 at the time of writing, which is six times its value last year.
Using Fishers example of a $ 1,000 mortgage payment, last October you would have owed between 0.08 and 0.09 BTC. Today you owe between 0.01 and 0.02 BTC. Imagine trying to set up automatic monthly payments for a 15 or 30 year mortgage with such variability. Its enough to make your head spin.
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Payoff In 14 Years And 4 Months
The remaining term of the loan is 24 years and 4 months. By paying extra $500.00 per month, the loan will be paid off in 14 years and 4 months. It is 10 years earlier. This results in savings of $94,554.73 in interest.
If Pay Extra $500.00 per month
|Remaining Term||14 years and 4 months|
|24 years and 4 months|
The Mortgage Payoff Calculator above helps evaluate the different mortgage payoff options, including making one-time or periodic extra payments, biweekly repayments, or paying off the mortgage in full. It calculates the remaining time to pay off, the difference in payoff time, and interest savings for different payoff options.
Paying Off Your Mortgage: What To Expect
From the moment homeowners sign onto a mortgage, they often look forward to the day they pay it off. As tempting as it is to save on interest rate payments and pay off your mortgage early, its important to look at your financial health to avoid becoming house rich and cash poor.
Still, the day will come when you make that last mortgage payment. Usually, people pay off their existing mortgage in one of three ways:
- When they sell their home.
- When they make their final payment to pay off the loan.
Lets break down some common questions about the payoff process. Parts of the process are the same for every lender, while other details are specific to Rocket Mortgage®.
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Get On Top Of Your Finances
Ifyou have any debts, especially expensive debt such as on a credit card, then nows the time to use that extra money to clear them.
You should also consider topping up your savings as you suggest they arent that big. The recommended amount for an emergency pot is a few months salary in an easy-access savings account. Its essential to give you peace of mind should you be made redundant or the car breaks down.