Most of us dream of the day that our home mortgages will be paid off and we’ll have all that extra cash to spend on the things we have always wanted to do. That’s the dream, but the reality may be a bit different.
The major advantage to an early payoff is that you will save thousands of dollars in interest costs. A 30-year fixed-rate mortgage for $165,000 at 4.25% interest will cost you nearly $127,000 in interest if you pay it off over the full 360-month period at $984 a month. If you pay just $100 a month more, beginning after you’ve had the mortgage for five years, you’ll save nearly $20,000 in interest payments.
A second advantage to an early payoff is a boost to your overall credit rating. With less debt to pay, you’re a better bet for low interest rate credit cards and car loans.
Now that federal tax laws have changed to limit the amount of mortgage interest you can deduct, homeowners need to figure out how the changes affect them individually and whether an early mortgage payoff is a benefit. In general, married homeowners filing a joint tax return may deduct interest on mortgages of up to $750,000 (half that if married filing separately or singly). Tax deductions for home equity loans have been eliminated, and there are other details to pay attention to. MarketWatch published a good article explaining the tax implications on mortgages of the new law. It is well worth reading.
The pros at Realtor.com suggest that you consider both the pros and the cons of an early payoff, preferably with the aid of a financial advisor you trust. If you decide to go ahead, here are some steps you can take to make it happen:
- Make a payment at the end of year once you see what extra cash you have. Specifically make the payment to the principal so it reduces the amount of interest you will pay in the future.
- Make an extra payment monthly in a separate check citing “principle” in the memo line.
- Make one-thirtieth of the payment every day to make certain no interest ever accrues.
- If you have mortgage insurance, track your loan-to-value ratio on the house and refinance once you hit 85% LTV [loan-to-value]. This could mean hundreds in savings each month which can be applied to the principle balance rather than the bank’s insurance.
Bankrate.com has an early payoff calculator that can help you see how much you can save.