We asked for advice from Pete Boomer, executive vice president of mortgages at PNC Bank; and Melody Robinson Wright, director of financial education at Kinly. Both responded via email and their responses have been edited.
What are some reasons a homeowner might want to pay off their mortgage faster?
Wright: Knowing that you own your home is a major incentive to pay off your home sooner. Some homeowners may consider prepayment to save on interest, free up cash, or reduce overall debt before they retire or reach other life stages. Paying off your mortgage early also allows you to say goodbye to private mortgage insurance (PMI) fees, as they can be waived once you reach 20% of home equity. With PMI fees ranging from 0.5% to 2% of your loan balance, freeing up that money allows you to use it elsewhere, such as for improvements to increase the value of the home or to take advantage of opportunities to wealth creation.
Boomer: Another great benefit of paying off a mortgage faster is building equity in the property. A very effective strategy to achieve this is to make an additional monthly payment per year. Homeowners can pay off a typical 30-year mortgage eight years earlier.
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What are the advantages and disadvantages of early repayment of a mortgage?
Wright: Paying off your mortgage early reduces your debt burden and potentially saves you thousands in interest. However, depending on how aggressive your payment schedule is, you may find that it prevents you from achieving other financial goals or missing opportunities to grow your money through investments. With a paid off mortgage, you would also lose the ability to take advantage of tax deductions for mortgage interest payments.
Boomer: An obvious advantage is that it eliminates a monthly mortgage payment, allowing owners to tackle other debts or invest in other businesses. Additionally, an early payment will reduce the amount of interest a homeowner will pay over time. A potential downside of prepaying a mortgage is that it may come with a prepayment penalty, so it’s important to understand the details included in your loan documents.
What are the advantages or disadvantages of the different methods to speed up the repayment of your mortgage loan?
Wright: a) Lump Sum: Making a lump sum payment can reduce the time it takes you to repay the loan as well as the amount of interest paid over the life of the loan, saving you a lot of money. A large lump sum payment can also be advantageous if you can recast the loan. When recasting, the loan is re-amortized to the lower principal balance amount, resulting in a lower monthly payment. However, some loans such as FHA or VA loans are not eligible for recast, fees may be charged, and other criteria such as a minimum lump sum paid may need to be met to be eligible for a loan recast. b) Extra Monthly Amount: Paying extra on your loan, regardless of the amount, can reduce your total interest and loan term. The downside is that you may need to follow special rules to make sure the extra money is applied to your principal and follow up to make sure the payment was applied correctly. c) Additional Annual Payment: Making an additional annual payment is beneficial because it reduces the term of your loan while potentially saving you thousands of dollars in interest. d) bi-weekly payments: bi-weekly payments work to your advantage by giving you one additional mortgage payment per year for a total of 13 payments instead of 12 payments. This can help you save a little on interest. The downside is that some lenders may not offer you the option of bi-weekly payments or you may be charged additional fees. e) Refinance into a short-term loan: Refinancing into a short-term loan can reduce the term of the loan and the amount you pay in interest. However, before refinancing, ensure that the benefits outweigh the cost of refinancing your loan and that you are able to afford the higher monthly mortgage payment.
Any advice for people who want to repay their loan faster?
Wright: If you’re looking to pay off your loan faster, create a plan for how quickly you want to pay it back, and think about changes you could make to your current budget or spending plan to help you reach that goal without getting in the way. other financial goals. Even without refinancing, you can pay off a 30-year mortgage like a 15-year mortgage by making additional payments. You can also pay off your loan faster by creating a rule to allocate a percentage of any money earned or received through side activities, deals, or bonuses to your mortgage.
Boomer: A good option is to automate the refund. This can be done by dividing the monthly payment by 12 and applying this additional amount directly to the principal each month. Automating these payments and building them into a homeowner’s monthly budget is a great way to get a mortgage paid off faster.