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Most people need a home loan to get the dwelling of their dreams. It is the one form of debt that financial experts typically do not frown upon.
However, there are times when it makes sense to pay off your home loan early.
Reducing the time it takes to retire your mortgage may be to your advantage if you want to free up monthly income for other purposes. What follows are seven examples of when it pays to pay off a mortgage ahead of schedule.
1. You’re tired of paying interest to a lender
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Lenders earn money by collecting interest on loans. That means the longer it takes to pay off your home loan, the greater the profit your lender will realize.
Let’s say you bought a home five years ago for $300,000 using a 30-year, fixed-rate loan at 4.5 percent interest. Your monthly house payment is $1,520, but if you add in another $572 each month you can pay off the debt in 15 years instead of 25.
You’ll probably need to make short-term financial sacrifices to come up with the extra cash. But it will be worth it in the long run, as it will save you nearly $80,000 in interest charges
That’s more than enough to pay for a spectacular mortgage-burning party to celebrate your financial freedom.
2. The weight of your mortgage payments is causing you stress
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Taking on a home loan is a major commitment. It means you must come up with a monthly payment for up to three decades, no matter what other financial challenges you may face.
“People definitely suffer from lots of different kinds of financial stress, and your debt and mortgage is a big part of that,” says John Bodrozic, co-founder of , a digital home management platform.
If you miss payments, your home might go into foreclosure, putting your investment at risk. If worrying about paying the mortgage keeps you up at night, end the agony by coming up with a new payment plan that retires the debt early.
3. You want to free up monthly income for retirement
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A home loan typically is the largest single financial obligation that people face. Many homeowners strive to pay off their mortgage before reaching retirement age. That way, they can reduce monthly expenses before they quit their jobs and begin living on fixed incomes.
Paying off a 30-year mortgage before retirement can be a challenge. The reward is that you’ll have more disposable income in old age.
“It’s important to have few monthly bills so you can enjoy your retirement and do all the things you wanted to do when you retired,” says Randall Yates, founder and CEO of , an online lending marketplace.
4. You’re planning to put your kids through college
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If you have children who will attend college before you pay off your home loan, you may face an unmanageable financial burden.
Average tuition and fees for the 2017-18 school year was $9,970 for in-state students at four-year public colleges, and $34,740 at four-year private schools, according to .
Paying off your home loan early will give you more flexibility to address these costs.
5. You want to gain access to your home’s full equity
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One of the great things about paying off a home loan early is that it gives you the financial security of having access to your home’s full equity, the market value of your property. That means you’ll have a ready source of cash if you need to address unexpected expenses.
“If you’re ever in a tough spot you can always get a home equity loan and access most of your home’s value,” Yates says.
Just remember that tapping into home equity isn’t free. It requires to you take out a loan that will need to be repaid.
6. You want the freedom to explore new opportunities
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When you’re making payments on a home, it limits your ability to explore career opportunities. Giving up a dependable, steady job to try a new profession or return to school to learn new skills can be a risky venture.
If you can pay off your home loan early, you’ll have fewer financial obligations and more freedom to pursue your dreams. These might include starting a business or embarking on a new career.
Once your loan is paid off, you get “a double win,” says Bodrozic. Your monthly expenses will drop and your home will become a financial asset you can draw on.
7. You’re not comfortable carrying a large debt
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For people who are averse to debt, owning a home free and clear is a benefit that can’t be measured in dollars and cents.
Holding the title to your own dwelling can bring you a sense of security and peace of mind. You’ll know that even if you suffer a financial setback, the home will be yours. Because residential real estate typically appreciates in value over time, paying off a home loan early is a sound long-term investment.
Once you pay off the mortgage, “you’ll have thousands of dollars each year that you can use for vacations, paying off credit card debt, or investing to build wealth,” Yates says.
Have you paid off your mortgage? Let us know how it worked out for you by commenting below or on .