Paying off Mortgage Early Pros and Cons

Most individuals who own a home and have mortgages to pay feel delighted when they are in a position to pay an extra installment on mortgage or have cash at hand to do the same. But weighing the pros and cons of early payment is essential because, in some cases, paying off early might not seem a very good option.
Owning your own home is no doubt a very comforting thing, and of late, mortgage loans and home loans form the basis of this transaction for several people. 15 and 30 year mortgages, today are the most common ones that are used by people to buy homes. Post the recession era and the sub-prime crisis, there are several people who are in a position to repay or pay off mortgage early. Pros and cons of paying off the mortgage early, have to be considered properly to take the decision of paying off the mortgage. In the following paragraphs some advantages and disadvantages of paying off the mortgage quite easily have been discussed.

About Mortgage Loans

A mortgage loan is principally, a secured loan that is used to purchase, non commercial real estate, and the purchased real estate is then pledged as a collateral with the lender. For a standard 30 year mortgage the rate of interest ranges from 4% to 6%. Federal Housing Administration (FHA), Freddie Mae and Fannie Mae are some governing bodies of mortgage loans in the United States. When it comes to mortgage loans, borrowing from recognized and approved banks and financial institutions are recommended due to their better terms and conditions and lower interest rates. Private lenders for mortgage, in contrast, tend to have a higher rate of interest. The words 'paying off early', imply repayment of the entire loan before the end of the term, that is the stipulated time period. It must be noted that in such cases the total interest amount of the loan is not included in the early repayment or settlement of the account. Here is where the mortgage lender suffers from an opportunity to revenue.

Pros and Cons of Early Payment of Mortgage

  • The first among the disadvantages of paying off mortgage is that there is a certain early repayment charge that is levied. Often people wonder, is there a penalty for paying off mortgage early? Well, yes but it is not a penalty, and is an early repayment charge. The lender imposes this penalty because, due to the early repayment, he is going to suffer from a certain loss and charge is a partial recovery of the loss. This charge, which in some cases is also known as redemption penalty, is substantial and you will have to seriously reconsider it. In such cases, if you are planning to repay the loan early, then make provisions for this charge.
  • Next, you will also need to take into consideration the tax implications of the repayment of mortgage. The total of the entire interest that you have not paid is considered to be an income. In addition to that you will also lose the deduction facility that is involved in the process.
  • Lastly, purely from a financial aspect, the entire transaction is not very economical as you will be draining a considerable volume of your cash and savings. This is you have been through 50% of the repayment procedure, calculate and assess whether the transaction would prove to be economical or not, otherwise you will end up having a hard couple of years. Simply put, the amount that you pay the lender as early payment plus redemption charge should be less than total of all installments plus total projected interest rate.
  • The first benefits of paying early is that the home becomes yours, and you do not have to worry any more about the mortgage payments.
  • The second advantage is that you save up on a lot of interest rate in the process, as you won't have to bear several year's worth of it, once you settle the account. You also curtail the risk of late payment and late payment fines by settling the account.
  • The third advantage is that you tend to have the equity of the house as your asset. With the help of this equity you can get different loans such as Home Equity Loan (HEL) and Home Equity Line of Credit (HELOC). The sale also leaves you not just extra money to spare each month, but would also have the authority to sell, rent out or lease the property as per your wish.
I would recommend not to blow your life savings in paying off early. Pros and cons may also differ from case to case, however there is no denying the fact that this kind of transaction proves to be effective and useful in case of some transaction, whereas it proves to be a loss in some selected cases. Hence, calculate assess and then decide.
By Scholasticus K
Published: 2/4/2011
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