Why You Should Pay on Your House Early

Why You Should Pay on Your House Early

Home ownership is a major step for everyone’s financial life. When you buy your first home you’re usually very excited and can’t wait to get into your home. Often times people are so excited to get into their home that they don’t wait to save up a 20% down payment and end up paying un-necessary private mortgage insurance. Other times people lack good credit and really want a home so instead of being underwritten manually, they end up getting exotic mortgages such as interest only loans which will leave you high and dry over time. Some of them even have negative amortization schedules which leave people owning more money over time! When buying a home, be sure to get a 15 year fixed mortgage, and don’t get into one too soon! You should also pay on your home early, and here’s why.

First and foremost, if you have to pay private mortgage insurance because you had less than a 20% down payment, you can get rid of your private mortgage insurance by increasing your equity to more than 20%. Once you make extra payments and have more than 20% equity, you can have an appraisal done and your mortgage company will be forced to drop the PMI, saving you about $50 per month for every $100,000 you have invested in your home. This is just about equivalent to receiving a 0.6% discount in your APR, and who wouldn’t take that?!

It gets even better though. Your mortgage has an amortization schedule which means that in the beginning you are paying mostly interest and practically no principle on your loan, and in the last few years of your mortgage you are paying mostly principle payment. What if you were to make extra principle payments with all the money you have around? This means that you would save on all of the interest on that amount of principal over a period of 15 or 30 years, depending how long your mortgage is paid over. Let’s assume you have a 30 year fixed mortgage for $100,000 at 6% APR. If on the first year, you had an extra $1000 for a principal payment, you would save $5,743 over the course of your mortgage! Imagine how many times you can multiply that power of compound interest by regularly making extra principal payments on a regular basis.

There’s also an intangible feeling that you get when you pay off your house. You are absolutely secure in your house, no one can take it from you, and there’s a value to it. The grass just feels different, you will experience this when you pay off your home.

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