How to Get the Most from your Home Mortgage?
When you have a mortgage, from time to time you may find yourself facing
questions of how to best handle it to get the most from it. For
instance, is it better to stick with the original payment schedule so
you can continue benefiting from the tax write-off or would you benefit
more from trying to pay it down and avoid the interest?
First, let's take a look at the option of sticking with the original
repayment schedule and benefiting from the tax write-off. There is no
denying that one of the advantages of having a mortgage is being able to
write off the interest on your taxes. Even so, you must consider how
much you are going to save with the tax write-off in comparison to how
much you could save if you eliminated your mortgage and the interest
altogether. In almost all instances, you would actually be better off to
pay off the mortgage and save the interest payments than continue paying
on the mortgage to take advantage of the tax write-off. The interest on
the mortgage is usually more than the benefit of the tax write-off.
As a general rule of thumb, if you have a 30 year mortgage and make a
20% down payment, the interest you will pay on that mortgage is twice
what you paid for the home with the 20% down payment. What most
homeowners fail to realize is that a mortgage loan is amortized, meaning
that you pay more toward interest than principal during the first part
of the loan term. Consequently, even when you have made payments for 24
years on a 30 year mortgage, you will still only have reached the
half-way point on paying off that debt. The remaining half will only be
paid off in the last few years of the loan. As a result, the earlier you
can pay off that loan the more money you will be able to save in
interest.
Another option that some homeowners consider is paying the minimum
amount on their mortgage and investing any additional money they might
have put toward paying off their mortgage. This does not work out
mathematically either. First, you must consider the fact that anytime
you invest money, there is a risk involved. Comparatively speaking, when
you put that money toward paying off your mortgage, there is far less
risk involved. In fact, there is almost no risk involved in paying off
your mortgage early. Also, consider the fact that if you have a 5% or 6%
rate on your mortgage loan, it can be difficult to match that rate of
return on any other investment.
Keep in mind that before you even think about starting to pay off your
mortgage, it is important to make sure you have a sufficient amount of
money in an emergency reserve fund. This will help to cover any repairs
that may pop up unexpectedly as well as help in the event you should
become unemployed or be unable to work due to a medical problem. After
you have set aside enough money in a reserve fund, the next best
strategy is to begin working on paying off your largest debt, which is
your mortgage.
You might also consider reducing the overall amount by refinancing your
home and changing it from a variable interest rate to a fixed rate or
simply taking advantage of a lower interest rate. This can help to
reduce the amount of interest you pay on your mortgage loan as well as
reduce your overall payments. The key to making this method work is to
ensure that you do not start over with another 30 year mortgage. If you
have already been paying on your home loan for ten years, replace the
existing mortgage with a 20 year mortgage. This will help to accelerate
the payments and also usually lower your interest rates.
Also, don't fall into the trap of thinking that just because your
mortgage payment is lower you should get by with only paying the minimum
due. Unless you are experiencing a financial hardship, take advantage of
the opportunity to pay down your mortgage by continuing to pay the same
amount as the old mortgage. The extra amount above the minimum due will
go directly toward reducing the principal on your mortgage, allowing you
to pay off your loan that much faster. Ultimately, this strategy can
make it possible for you to shave years and tens of thousands of dollars
off your total mortgage loan.
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