40% of Americans own their home outright.1 If you want to join them but still have a few months or even years left on your loan, you may be entertaining the idea of paying off your mortgage loan early. Whether you opt to make one extra loan payment a year or more, there are some questions you should ask yourself to see if this financial goal is the right move.
Questions to ask yourself before paying off a mortgage loan early
What are the benefits?
Aside from finally owning your home outright, one of the top benefits of paying off a mortgage loan early is that you’ll end up owing less in interest. Depending on how big your balance is or the length of the loan, this can add up to significant savings.
Another benefit is lowering your debt-to-income (DTI) ratio, which is one of the criteria used to calculate your credit score. Anytime you apply for credit, like a vehicle loan or a new credit card, a lender will look at your credit score to gauge your creditworthiness. Improving your DTI – and your score in tandem – will only work in your favor.
Are there costs involved?
Some financial institutions charge a prepayment penalty. Review the terms of your mortgage loan so there are no surprises. However, not all institutions nickel and dime their loan holders. The best credit unions will request your checking account and routing number to complete your loan payoff free of charge!
How soon should I pay it off?
Depending on how far along you are in your mortgage’s term, you may still have a significant balance left. Consider this when determining a reasonable timeline for paying it off. It’s not a good idea to drain your savings so you can submit one lump-sum amount, as you would be removing your safety net for emergency situations like a sudden job loss or illness.
A more long-term strategy that will still help you pay less in interest over the life of the loan is to submit extra payments. Some people submit one extra payment a year, so 13 instead of 12, while others opt for more. Review your budget to determine what works for you.
Crunching the numbers can help you understand the impact of this strategy. Consider a 30-year fixed-rate loan at 4.1% on a $200,000 home. By making one extra loan payment every year for 30 years, you could save around $28,000 in interest costs.2
How you get your loan balance to zero will depend on your current financial situation. Some borrowers may be able to submit one lump sum while others find biweekly payments more manageable. Regardless of how you go about it, General Electric Credit Union (GECU) is here to support you. Guided by the principle of Improving the Quality of Financial Lives, we strive to make homeownership more affordable for Tri-State families. That’s why we offer a range of free loan payment options and will never charge you a prepayment penalty, whether it’s for a home, personal, or vehicle loan!
When you’re ready to pay your mortgage off early, request a payoff by: