The idea of paying off a mortgage can be extremely appealing as people dream of owning their own home and being free from a large amount of mortgage debt. Of course, mortgages are long-term commitments, and it can be hard to picture paying off a mortgage when a zero-balance could be upwards of 30 years into the future. However, the time will come when the mortgage is paid off, and small decisions in the present can have a long-term impact. Paying off debt early does not have to be complex, but there are techniques that can be followed.
A little each month
Paying off a mortgage early is often about making additional contributions. These additional payments do not have to overly large, but they do need to be done on a consistent basis to make an impact. What many homeowners do not realize is that small payments made on a monthly basis can sometimes take years off of the back end of the loan. If individuals do not use financial software such as Quicken, there are many online calculators that can show the long-term value of an additional payment.
Budget cuts
When it comes to making extra payments, homeowners have to decide what is most important to them. Obviously, some people’s household budgets are very tight and do not have a lot of flexibility. However, there are certainly people who have a level of flexibility in their budget when it comes to disposable income. The thing that individuals have to decide is if they are willing to reduce short-term spending in order to benefit from long-term mortgage savings.
Regular payments
One way to reduce the mortgage is to make payments more often. Individuals can make payments more than once a month on their own. Or, they can utilize online banking services that allow for regular weekly or bi-weekly payments. The total amount paid each month might not change, but there is often a reduction in the interest since the balance is going down faster. Again, this may not seem like a major financial difference to the homeowner in the short-term, but in the long term it may result in saving thousands of dollars.
Tax ramifications
Mortgage interest can represent a large tax deduction for individuals who itemize their deductions. Therefore, paying off a mortgage and owning a house free and clear may be tempting. However, losing this type of deduction may have an impact on a person’s tax status. Some financial planners will recommend that paying down a mortgage is best done over a longer period of time and that any extra money should be invested. Ultimately, this is up to the consumer who must decide whether the peace of mind of owning a home is worth a potential loss in long-term investment income.
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