Should you pay off your manufactured home mortgage loan early?
Even with today’s low interest rates, the total amount of interest you may pay over the life of your mortgage can seem like a staggering amount. It's one of the reasons many people set a goal to pay down their mortgages early. But pre-paying a mortgage may not be for everyone. Here are some reasons to consider it:
- Paying your mortgage off will make you completely debt free.
- You want to reduce expenses as much as possible so you can put more money into your retirement fund.
- You live a country, such as Canada, where you do not receive a tax break because you carry a mortgage.
- You plan to move in a few years and will need cash for your next home - for closing costs or for a down payment. Applying more money towards your mortgage balance will increase equity, which can be converted to cash if needed.
- Currently, you do not receive a tax break on your mortgage interest. If your mortgage is small, your interest may not exceed the standard deduction the IRS gives non-itemizing taxpayers. Without that tax break, the actual cost of your mortgage is higher.
- You pay private mortgage insurance (PMI). If you have less than 20 percent of equity in your home, making extra payments will build more equity sooner, allowing you to cancel your PMI. And eliminating PMI will reduce your monthly payments.
But for some people, paying your mortgage off early can hurt you more than help you. Here are reasons to forego pre-paying your mortgage:
- Your mortgage contract includes prepayment penalties.
- You have other high-cost debts. Credit card interest rates are often more than twice that of most home mortgages. Any extra cash should go toward paying off the balance of those first.
- You want more money in your pocket now.
- You are in a high tax bracket and this additional deduction would lower your income tax bracket as well as your taxes.
- You want to put money into another investment such as the stock market or real estate.
Paying Off the Mortgage Early
By Ann Coleman (TMF AnnC)March 7, 2001
Q. Does paying off my mortgage early make sense? I've heard it isn't a good idea, but I've also heard you can save a fortune in interest. --R.M., via email
A. Paying off a mortgage early might make sense, but not from a strictly financial point of view. You do save a fortune in interest. The question is, what does that cost you?
You've probably heard all the arguments about the value of the mortgage interest deduction and how mortgage interest rates are lower than probable investing returns, yada, yada, yada. Obviously that hasn't convinced you. It hasn't convinced a lot of folks. So let's run a real-world scenario that doesn't even consider the tax deduction for mortgage interest, assumes a moderately high interest rate (which would motivate one to pay the mortgage off faster), and assumes a mediocre return on invested dollars. In other words, we're stacking the deck in favor of paying the mortgage off early. Let's see what happens.
We'll compare two neighbors with identical mortgages of $100,000 at 8% for 30 years. The scheduled payments are $733 per month. Fred, at 601 Motley Drive, runs some numbers and finds that by paying an additional $300 a month on his mortgage he can save over $103,000 in interest and pay the house off in 13 years. That sounds almost too good to be true. He jumps all over that plan.
Philip, at 603 Motley Drive, never ran the numbers, he just made his mortgage payments as scheduled. He also put $300 per month into a tax-efficient S&P 500 index fund that he read about on some website. He earns an average return on his index investment of 12.0% per year. (That's a smidge below the S&P 500's average return over the last 50 years and well below its average return over the last two decades.) At the end of 13 years, when Fred holds his mortgage-burning party, Phil's index fund account is worth $111,000 -- several thousand more than what Fred saved in interest and enough to pay off his mortgage in cash with some left over -- if he chooses.
But now Fred can start putting $1033 a month into savings, right? Putting $1033 a month into an index fund for the next 17 years, and earning an average of 12.0% per year, gives Fred an account worth $683,000 by the time Phil makes his last mortgage payment. Nice.
But... wait a minute. Phil kept socking away his paltry $300 a month. By the time his house is paid off, his investment account has grown to over $1,048,000. Both guys own their houses free and clear, both have paid out exactly the same amount every month for 30 years, but Phil comes out way ahead.
Now what?If Phil had invested just the difference between his mortgage interest deduction and Fred's, his account would have been a quarter million bucks bigger. That would pay for one heck of a mortgage-burning party. Wanna throw your own big bash? Do the math on your mortgage by using the online calculators in our Home Center.
Is Paying Off a Mortgage Early a Good Idea?
Many consumers are confused about whether or not paying off a mortgage early is a good idea. Below you’ll find some helpful information about paying off a mortgage early.
Don't Rob Peter to Pay Paul
It’s definitely not a good idea to make larger payments on your mortgage then necessary if doing so will cause you to fall behind in your other bills. Paying off a mortgage does have advantages for many consumers especially those who like the sense of security it provides, but you have to be realistic about how much extra money you can afford to pay on your mortgage.
Obviously if you pay extra on your mortgage each month you are paying down your principal sooner and will ultimately reduce the amount of interest you have to pay. If you have a good fixed interest rate, you might not want to leap into paying off your mortgage early. There are certainly worse types of debt to have, and you should always address your debt that has the highest interest rate first.
Don't Overlook The Tax Issue
It’s important to take into consideration the tax deduction you will receive for the mortgage interest you pay. You will be losing out on that benefit if you are paying off a mortgage early, so calculate this into the equation when you are determining just how much extra to pay on your mortgage every month.
Credit Cards First
If you have credit card debt, it isn’t really a good idea to focus on paying off your mortgage early. Basically, the interest rates on your credit cards are going to be much higher than the interest rate on your mortgage. Until you eliminate your credit card debt, you don’t even want to think about paying off a mortgage early.
Use The Tools Available To You
There are online calculators that can help you determine just how much extra you would have to pay each month if you wanted to pay off your mortgage by a specific date. The calculators can also help you determine when you mortgage would be paid off if you have an extra $50, $100, or $200 to pay each month. As you can see, there is no clear cut answer about whether or not paying off a mortgage early is the best option for everyone. Use you judgment and research your options before you make a decision about paying off a mortgage early.
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