Repaying a mortgage is a critical financial decision requiring much thought before execution. People commonly think paying off the mortgage is a good thing. If you have saved money and have some financial sense, you must decide whether to pay off your mortgage or use that savings to invest and grow your money.
Mortgages are one of the most common types of loans. Suppose you have some savings and consider paying off part of the mortgage in advance. In that case, you must consider many variables and assess the better use of your savings, paying off the mortgage, or investing.
To make a good decision, you must first know the most important thing: nothing but understanding what repaying a mortgage is and when you can do it. There are distinct advantages and disadvantages to paying off your mortgage early.
What is the Mortgage Repayment?
Repaying a mortgage is paying extra money on your real estate loan to reduce the monthly payment or shorten the loan duration. You can partially repay the loan amount and shorten the length of the loan. The partial repayment of the entire loan is generally more feasible, given that few people save enough to cancel the mortgage loan altogether.
The average amount of a mortgage loan in the US is approximately $150,000, with a repayment term of between 25 and 30 years. If you pay a monthly installment of $1,000 without considering the fluctuations of the interest rates, you could reduce your mortgage by $12,000 a year, with less interest and expenses.
But if to the monthly installments, you add an extraordinary $10,000 as repayment. You would reduce your loan considerably in one cut. In that case, you have two options: reduce the amount of your monthly liability or reduce the life of the loan.
When is it Good to Cancel Your Mortgage Early?
Is it better to use savings to pay off early canceled mortgages, or is it better to use that money to invest? The answer is somewhat complex, and there are four factors that you should keep in mind:
- When did you sign the mortgage contract?
- The interest on the mortgage?
- Your knowledge of investment products?
- Your risk tolerance?
Should You Pay Off the Mortgage?
You have several legal assumptions regarding repayment, the most important being that you bought the property before 2013. So, you can deduct a maximum limit of $9,040 annually if you are the sole owner or $18,080 if you share the loan ownership and declare taxes separately.
In those cases, the Treasury returns 15% of the amount contributed by investment in habitual residence.
However, there are some assumptions in which you can deduct the amortization of your mortgage as indicated in the 2018 Income Practical Manual for the 2020 campaign, published by the Tax Agency.
Amortize Mortgage by Interest
An essential factor to consider is your interest rate for your fixed or variable mortgage. Since the great financial crisis at the end of the last decade, central banks have embarked on policies to lower interest rates, which impacted the cost of mortgages.
Today, it is normal to find mortgages that pay 2% or even less. Against this information, it is wise to analyze whether you must pay a loan that costs 2% per year or invest in the stock market or equities that offer an average of 10% each year.
Faced with a low-interest rate scenario, we should evaluate the possibility of investing the money to gain from the interest rate differential. It is a risk, but you can earn a little money in that operation. In addition, you can always withdraw the money from the investments and pay off the mortgage if the Federal Reserve decides to raise interest rates.
Your Knowledge About Investing
Suppose you do not know much about the product you will invest in and are interested in paying your debts as soon as possible. In that case, the decision is straightforward, and amortizing the most money is your thing. This way, you will leave the mortgage as soon as possible.
How Tolerant You are to Risk
If you know about investments and you like risk, the option you could consider would not be to reduce the time of your mortgage through early repayment but to invest that money saved. In the stock market, you can make an average of between 5 and 10% per year, while you pay about 2% in a mortgage.
If you have a conservative risk profile and a low level of risk, it would be best to pay off the mortgage. On the other hand, if you have a moderate or aggressive risk profile, you may find it more profitable to allocate the savings to investment products.
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