Posted by BEST FINANCIAL GROUP LTD

Understanding the Pros and Cons of Prepaying Your Mortgage

Understanding the Pros and Cons of Prepaying Your Mortgage

One of the dreams of many people is owning a house. Many people undertake this critical step by taking a mortgage. It can, however, become a burden depending on the type and nature of the mortgage you go for. The best mortgage you should go for is the one in which you will not have to pay all through your lifetime.

This explains why many people consider the option of making prepayments on their mortgage. People wonder if it is a good idea! 

Sadly, this does not have a yes or no answer. 

Early prepayment of your mortgage will help you save a lot of money when you consider the Interest you need to pay on it. The equity of the home increases, and you take ownership of the house.

However, there are other things you should consider. For instance, will it make sense for you to have your money elsewhere? Should you settle debts? Also, saving for retirement is another worthy alternative to ensure your future security and comfort. There is also the place of funding your emergency account. If all these are not set up, rethinking prepaying your mortgage is an option to consider. 


Prepaying Your Mortgage: Pros

Prepaying your mortgage comes with a lot of advantages. Some of these are addressed below:


Reduction in Loan Cost

Prepaying your loan cost reduces the overall cost of your loan. Let us consider someone that took a loan of about $100,000 at 4% for 30 years. This person will pay $477 per month. If this person makes 13 payments every year, rather than 12 payments, he will save more than $10,000. This will also reduce the loan repayment term by four years.

Be sure to negotiate with your bank so that the extra payment goes to the principal amount and not the interest. Paying your Interest early does not translate to faster equity.

A note of warning is that people need to be clear about prepayment penalties. Hence, be sure you understand the terms before the prepayment.


Your taxes and Interest will be affected.

One of the cons of prepaying your mortgage is that you get tax breaks. This, however, does not apply if you pay off the mortgage entirely. The benefit here, however, is less Interest in the final Loan. This makes it beneficial to repay the loan on time. We, however, are not sure if the tax benefit is more than the Interest.


You pay the Loan sooner and reduce Interest.

One of the most glaring advantages of prepaying your mortgage is that you get to reduce the duration you have to pay the Loan. This translates to better cash flow for the future. For young people with a family, there is the concern of school fees, feeding, and tuition fees, among others. It makes more sense for you to go through these years without the stress of mortgage payments. 


Positive Impact on Your Credit Score

Having fewer debts with the ability to make monthly payments will affect your credit score. Your credit score will be hinged on how you handle your financial obligations. As a result, when you make your mortgage payment comfortably, it will improve your credit score.

With a good credit score, you will be eligible for future loans. With this, money lenders will know you are capable of taking care of debts.


Cons of prepaying Your Mortgage

While the benefits of prepaying your mortgage appear attractive, it does come with some drawbacks as well. Here are the disadvantages


Lack of Money for Other Project Investment

Prepaying your mortgage sucks money. This means less money to undertake other ventures. It could also make terrific opportunities (like bonds, stocks, REITS) pass you by. Your financial advisor is in the best interest to guide you on where you can invest the extra cash that will translate to better financial returns.


Higher Interest Debts Could be Better

Rather than prepaying your mortgage, paying off higher interest debts is an idea worth considering. For instance, folks with credit card loans, student loans will attract a pretty high-interest rate. Financial wise, this makes a lot of sense. Prepayment of mortgages should come when you are financially buoyant for such.


The tendency to Ignore Other financial commitments

Many people have other financial obligations apart from paying off debts or investing. Retirement saving is an example which will ensure that you are comfortable after leaving the job. Ideally, your emergency funds should cover as much as six months of essential living without any extra income.


FOR MORE INFORMATION ON HOW WE CAN HELP YOU WITH TAX FILING IMPLICATIONS ON PREPAYMENT OF MORTGAGES OR ANY OTHER FILING NEEDS, PLEASE CONTACT Best Financial Group, LTD, BY CLICKING THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.  





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