Benefits of Paying Off Your Mortgage Early

Benefits of Paying Off Your Mortgage Early
By Cerkez Lena

The invention of mortgage loans has made great contributions towards offering people the opportunity to purchase their homes, however it can come at a great cost. While mortgage loans are commonly generated by mortgage companies, and held for the life of the loan, others are sold off to banks. You do not hold a title to the house until the mortgage loan is paid off. The price you pay for the privilege of having a mortgage loan is the form of interest expense. The terms of a mortgage loan can range anywhere from 5 to 30-years, with interest rates of 3% to 5%.

Most individuals will get a loan that contain 30-years payback terms, by which time ownership title of the home will be release to you. I would like to share and demonstrate how paying a little extra each month will cut not only the amount of interest you pay to the bank, it will also cut down the payback timetable. Consider that a home loan of $225,000 with a 3.75% with 30-year term will end up costing you around $375,123.63 at the end of 30-years, with a monthly mortgage of $1,041.01 per month, excluding home insurance, mortgage insurance, and property taxes. You would have paid of the initial principle of $225,000, as well as $150,123.63 in interest to the bank or mortgage company.

The simplest way to cut down the payback period, and interest you pay to the bank is by making extra payments each month. Putting $100 extra each month after the first year would cut your interest expense down by $23,223.79 over the life of the loan, as well as take you payback period down from 30-years to just under 26-years. This puts the power of that extra $100 per month in perspective, and the impact that it can have over a long-term period. If instead of $100 you decide to make an extra payment of $200 per month, you would save $39,680.04, and cut down your payback period from 30-years, down to just under 23-years.

The extra payments are applied directly to reducing the principal payment, so the lower the principal the lower the interest that is charged by the bank. By making an extra monthly payment of $200, you are able to save just under $40k for retirement, as well as cut your payback down to 23-years before you are mortgage free. The savings on the interest alone over a 23-year period adds up to around $1,725.22 per year. This is a great wealth building strategy, as it will help keep more of your hard earned money in your pocket that you can use to invest. Bottom line, if you are not able to do $200 per month, doing simply $50 per month can also have a beneficial impact.

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