Pay Off Your Mortgage Early

One of the most frequently asked questions in recent times is how do you pay off your mortgage early. Simplest way is to accelerate payments. But before starting any such process, it is necessary to analyze whether it would be a wise financial decision.

There are several perceptible and imperceptible advantages that mortgages offer, apart from facilitating home purchase, of course. Since the payments are well into future, the present value of these payments in future needs to be considered. If these payments were discounted at the average inflation rate of the last 10 years, it would be obvious that the effective interest being paid on the mortgage is far lower than what has been mentioned in the mortgage loan sanction letter. This is just one aspect. There are tax savings on interest paid on loan to consider. Equated Monthly Installments (EMIs) are more easily manageable with time, as with each year, there may be some increment of remuneration, and therefore, proportionate outflow from monthly income towards mortgage repayment, keeps on diminishing. There are hardly any large loans available in the markets that are as affordable as mortgage loans. This is because mortgages are repayable over a long period, and in affordable EMIs that include interest. Effectively, the burden of EMIs on monthly budgets keeps on getting lower. These are reasons enough not to pay off your mortgage early, even if left with surplus funds. These funds on hand can instead be invested in some government securities that fetch regular income, and this income can be used to repay part of the mortgage loans, thereby reducing monthly incidence. Alternately, the borrower can consider purchasing any investment property, income from which can be of a great help in retirement.

The other side of the coin is not very pleasant. Recent spurt in foreclosures, and lack of demand in housing market would make anybody averse to mortgages. Such situations can come when there is recession. Recession, or economic crisis, may result in drying up of liquidity in the markets, leading to higher demand for the remaining liquidity, which in turn means higher interest rates. Higher interest rates means businesses in fragile phase have to cut down costs, and therefore, people lose jobs. When jobs are lost, obviously it becomes difficult to pay the EMIs. Since there is no predefined date or month that can be identified as end of the recession, it becomes difficult for the borrowers to decide whether they should continue with the mortgage, pulling out from their savings, or try to sell the property under mortgage. By the time borrowers realize that recession may take longer than they thought it would to disappear, their savings are exhausted, and they still don't have a job that can cover this mortgage payment plus monthly expenses! Under normal circumstances, foreclosure helps the lenders recover their monies, and it can be business as usual. But recession is something different. Here there are no buyers. Even if the lenders choose to confiscate the property, they would not be able to sell it to anybody. Even the borrower is not able to sell the mortgaged property at any price that can clear the debts. It is such an impasse. Effectively, mortgages can force people out of their homes!

So it is a choice between two scenarios - one in which interest and inflation rates are slipping, and another in which these are climbing. Which one should the borrower choose? It depends upon exactly in which scene he is in. If he is in a phase where inflation and interest rates are moving up, and likely to move up still further, then opting to pay off mortgage quickly will be the right choice.

So what are the ways to pay off your mortgage early? Increase the monthly installments, if you can. That is the fastest and comfortable way to bring down the repayment term. Alternately, pay a lump sum whenever any surplus money is available on hand into the mortgage account. Third way is to integrate all the available bank accounts with the mortgage account. This will help in ensuring that the outstanding balance at any point of time in the mortgage account is lower than it would have been, had the accounts not been integrated. Because of this interest for the month on mortgage loan is lower. This means within the EMI, the principal component is higher than what it would be otherwise. Therefore, the outstanding amount for the next month stands reduced by higher principal amount in the EMI, leaving much lower opening balance for the following month. This process is slow but if monitored regularly, it starts showing results. Some people opt to take line of credit when it is not possible to combine the mortgage loans with the rest of the accounts. Line of credit is just an overdraft facility that the bank extends on security of some reliable financial instrument, such as government bonds. Since the object is to keep on using the line of credit continuously, such government bonds should be long-term bonds. The line of credit can be used like a dummy mortgage loan, and periodically a lump sum from it can be transferred to the mortgage loan. Of course, payment of EMIs should continue normally.

Some credit card holders have optimally used the zero interest period of their credit card to purchase their groceries, thereby ensuring that more balance remains in their line of credit account or mortgage plus other accounts, as the case may be. Effectively, they use credit card company's funds without paying any interest on them. Since interest in line of credit and mortgage loan account is calculated on daily balances, this system works quite well. However, the borrower should keep in mind the dates and choose to pay the amounts into credit card well before the due date. That way, they will not be trading costlier debt for cheaper debt. Of course, experience in managing finances to such micro level comes handy. In general, a meticulous follow up of each and every receivable, and attempt to delay any amounts payable from the mortgage loan/line of credit account will help to pay off your mortgage early.