What are the benefits of paying a home off early?
There are some significant financial benefits to paying a home off sooner than the normal 30-year timeframe that most lenders offer in today’s market. Paying a home off just 1 year faster can have a significant impact on the interest paid over the life of the loan and shortening a term from 30 years to 15 years will drastically reduce interest rates and overall payments. Accelerated equity can also provide a safety net for many owners along with flexibility in retirement planning.
Cost Savings:
There are 2 significant cost benefits to paying a home off faster. Consider these 2 options to finance a $300,000 mortgage –
| Option A | Option B | |
| Term | 30 Year | 15 Year |
| Rate | 3% | 2% (1% lower) |
| Monthly Payments | $1,265 | $1,930 |
| Total Payments | $455,400 | $347,000 |
| Savings | $108,000 |
Equity Flexibility:
As a byproduct of the shorter-term loans, equity gain is accelerated. After 24 months in the scenarios above, Option B will have a remaining balance that is more than $20,000 lower. More of the monthly payment will go towards the principal balance and equity is earned faster. This gives the homeowner flexibility should they need to sell the home, or tap into equity for any reason. In the case of a relocation, those funds could be applied to a down payment on a new home, allowing for better terms and rates again.
Retirement:
Equity in a home can be used in retirement to supplement income in a tax-free manner via a reverse mortgage, or another home equity instrument. In the case of complete home payoff, the retirement budget can be stretched significantly farther if a mortgage doesn’t need to be accounted for. Having hard assets can also offer advantages when making estate plans, trust or living trust arrangements.
Bonus Tip:
The Bi-weekly payment hack: Bi-weekly payments can be a pain free way to budget additional payments to shorten your mortgage term and save thousands of dollars in interest. Instead of making a single monthly payment on the first of the month, make half of your normal monthly payment every 2 weeks. This results in an additional payment being made twice a year and could shorten your term 3+ years. Every homeowner is in a unique situation. The purpose of today’s post it to outline some possible benefits to paying a home off early. Please consult a mortgage professional to discuss your specific situation.
