Why Paying Home Loan Mortgage Early Is a Mistake?

By Sakshi Srivastava - 11 Jan 2022 Last Updated: 27 Jan 2022
Why Paying Home Loan Mortgage Early Is a Mistake?

The term Home Loan refers to a loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property serves as collateral to secure the loan. A borrower must apply for Home Loan through their preferred lender and ensure they meet several requirements, including minimum credit scores and down payments. Home Loan applications go through a rigorous underwriting process before they reach the closing phase. Home Loan types vary based on the needs of the borrower, such as conventional and fixed-rate loans.

How Home Loan Works?

Home Loan are used by individuals and businesses to purchase real estate without paying the whole purchase price up front. The borrower pays back the loan plus interest over a set period of time until they acquire the property outright. Liens against property or claims on property are other terms for mortgages. If the borrower defaults on the loan, the lender has the option to foreclose on the property.

Paying Off Your Mortgage Early, As Tempting as It May Seem, Is Not Always the Best Option

Most individuals can't afford a home without taking out a mortgage, but those monthly payments can get tedious after a time. You might be tempted to try to pay off your mortgage early if you're weary of paying a chunk of money to your mortgage company every month. However, it is not the best option want to know why have a look on the below points and decide by yourself

Earn more by Investing

Investing allows you to earn more money. Right now, the average mortgage interest rate is roughly 3%. Over a ten-year period, the average stock market return is around 9%. So, if you pay off your mortgage 10 years early vs investing in the stock market for 10 years, you'll almost certainly come out ahead by investing.

Prepayment Penalties apply to Mortgages

 A mortgage prepayment penalty is a cost you pay the lender if you sell, refinance, or pay off your mortgage within a set period of time after the initial mortgage closes - usually three to five years. This cost isn't charged by all lenders, and if you're paying off your mortgage in more than five years, you generally won't have to worry about it. However, you should always consult with your lender first.

Lose the Mortgage Interest Tax Deduction

The mortgage interest tax deduction is no longer available. You can deduct the amount you pay in mortgage interest from your taxable income if you are a homeowner. If you pay off your mortgage early, you'll forfeit this benefit.

Hurt your Credit Score

Your credit score will be harmed. Your credit score is determined by a number of factors, one of which is the mix of credit kinds you have. You may, for example, have a credit card, a vehicle loan, and a mortgage. Your credit score will drop if you remove one sort of credit. This should be a minor change, but it's worth thinking about.

Before You Pay Off Your Mortgage Early, Ask Yourself These Questions

If you really wish to pay your Home Loan aMortgage, early think twice and see if any below scenario applies to you

What would you do with the Money you'd save on Monthly Payments?

If you're paying off your mortgage early to free up more monthly cash flow, you should have a plan in place for how you'll spend it. If you wish to invest AED 9000 each month instead of paying your AED 9000 mortgage payment, that could be a beneficial use of the money.

It's ultimately up to you to decide how to spend the extra cash. Paying off your mortgage early may not be the smartest financial option if you can't think of what you want to do with the money or if you'd spend it on frivolous expenditures.

What part of your Retirement Strategy does paying off your Mortgage early play?

Everyone will have a different answer to this question.

If you know you'll want to live in this house in retirement, paying it off now so you won't have to make monthly payments afterwards could be the best option

However, if you're 10 years from retiring and haven't started investing, investing is a better use of your money than paying off your mortgage early.

Do you have any additional debts that you need to pay off?

The usual guideline is that you should pay off higher-interest debt first, followed by lower-interest debt. You may be paying a higher interest rate on a credit card or a private student loan than on your mortgage, so paying those off first will save you money.

However, don't pay so much toward your higher-interest loan that you end up falling behind on your mortgage payments. Yes, credit cards can be costly, and if you don't pay them on time, the issuer may pursue legal action against you. Defaulting on your mortgage payments, on the other hand, can put your home in jeopardy.

When it comes to whether you should pay off your mortgage early, there is no obvious right or wrong answer. It is dependent on your circumstances and your objectives.

Conclusion

As we discussed not paying Home Loan Mortgage early give you a lot of benefits and you can use that money to invest in other commodities and save tax until unless you don’t have a proper plan, we would suggest keeping your Home Loan and invest that money. To get more financial advice connect to our experts at Dhanguard and know how to get best returns on your investments.

By Sakshi Srivastava

11-Jan, 2022

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