Pay Off Your Mortgage

Responsible individuals dread debts. They take mortgages only because they don`t really have a choice, as real estate properties, especially homes cannot be bought without them. Mortgages are repayable over a long term, and are virtually like rent charges. When the borrower takes mortgages on adjustable mortgage rates, the EMIs also increase effectively, equating it to rent increases. Does that make it a worthwhile proposition to have mortgage paid off in less than 10 years? Not necessarily.

It doesn`t make sense to pay off your mortgage in 10 years if interest rates are south bound, inflation is southbound, and if you have taken an adjustable rate mortgage. In this situation the number of installments payable by you will come down anyway! Actually, it makes more sense to borrow on long term in this scenario because the value of any EMI payments in later years will be much lower than value of money at present. This is because of inflation factor for each year of the loan and its discounting effect on the value of EMIs. Therefore, you will find it much easier to repay the mortgage if the interest rates are falling or remain steady for a while. Moreover, remunerations keep increasing with passage of time, because of which also the burden of mortgage does not seem that huge with each passing year. In addition to these advantages, you are entitled to tax deductions in respect of interest paid on home loans making mortgages a very attractive part of financial planning in such a scenario.

Unlike this, however, if the market is strapped for money, interest rates will start climbing, and soon inflation will follow the suit. This is when your EMIs will start climbing if you have availed adjustable rate mortgages. This works like annual increase in rents. This can pinch the pocket really hard and finding ways and means to pay up off your mortgage in 7 to 10 years may be a sensible thing to do. Here the discounting effect of inflation on EMIs does not help much because EMIs keep increasing. Nor are the tax deductions adequate.

It can happen that you take a mortgage when interest rates are low, and as the years go by, you can find yourself in higher interest rate era. In this case, you do need to compare the other short-term credits that you are availing or planning to avail, and compare with the interest rates and terms applicable on the outstanding amount of mortgage loan. It may still make sense to hold on to mortgage. If, however, the credit available is cheaper, then it can easily be used to pay off your mortgage in 5 to 7 years.

There are three simple options for paying off mortgage in 10 years or less. Consolidate all checking accounts and club it with the mortgage account. Many banks offer such facility. This facility enables you to utilize the idle cash at any point of time, and thereby bring down the interest payable in that month. Therefore, if the outstanding mortgage amount at the beginning of the month was $100000, and the deposits and withdrawals from this combined account brought the average balance down to $97,000 then the interest charged for the month would only be on this lower amount of principal, resulting in higher amount of principal being repaid through the EMI of the month. Therefore, in the next month, the outstanding balance may only be $98,000, unlike in the normal mortgage loan where the outstanding amount may have been around $98,500. Of course, these are arbitrary figures, just to indicate what could be the effect of combining all accounts. Another way of paying off mortgages earlier is through line of credit. Taxpayers buy long-term government securities. These can be used as collateral to obtain line of credit, if the interest on line of credit is lower or can be brought to a lower level than the interest on mortgage loan. All incoming and outgoing funds can be routed through this line of credit account. Periodically, a sum from this account can be transferred to the mortgage loan account. This would be in addition to the normal EMIs. The effect is almost same as that in first case. This method is useful when it is not possible to combine the mortgage account with the rest of the accounts. The third and quite an innovative method involves making the most of the 0 interest credit period offered in the credit cards. Credit cardholders become liable for interest only when they cross the stipulated dates of payment. Therefore, credit cards can be used to pay the EMIs and just when the due date is round the corner, the amount should be paid into the credit card account from the line of credit. Effectively, interest on line of credit account will be much lower as the number of days for which the amount was outstanding is lower. This may leave the person with some surplus, which can be used to repay the mortgage.

All these ways require high level of financial discipline on the part of the borrower, and such discipline should be displayed consistently. However, it is very much possible, as many people have cleared their mortgages before time following these ways.