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Let me finally state this article might not always be true. There comes a point with fixed income investment and the overall valuation of the stock market it might be a safer bet to pre-pay your mortgage. When I originally wrote this article there was no question. Today might be slightly different, but overall I stand by my statement.
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How much can I save by prepaying my mortgage?
Home Loans can offer great tax benefits with attractive rebates on the principal and interest components. That’s a good enough reason for you to never overlook the tax benefits of the loan. Prepaying a Home Loan might not be the best alternative in every case. By paying the principal loan sooner you’re increasing the equity you have on your home, and will be able to own it earlier than expected. I pushed myself to pay double EMI for the initial few years as my interest rate at that time was 9.8%. So every month, the interest payment for the month goes down while principal repayment goes up.
If today’s rates are much lower than when you originally got your loan, your new payment may not even be much higher than your current one. Some homeowners are so eager to get rid of their mortgage that they pay extra money to rid themselves of the mortgage debt faster. Paying mortgage payments in advance, known as prepaying, can help you build equity faster, ultimately saving you thousands of dollars in interest charges and helping you become mortgage-free sooner.
Paying mortgage payments in advance
What I am saying is that you should try to prepay your loan through your regular income. In both cases, if I am comfortably paying the EMI, I will not prepay the loan. I will use this surplus/windfall to jumpstart my investment. I will try to prepay the loan, but not through this surplus. I will prepay it through my regular income from time to time.
Real gains should be calculated, only after you consider the tax benefits. So, in case you fall under in the higher tax bracket, the amount of tax you will be able to save by claiming deductions will be quite a big amount. Now, since he will be repaying his loan early, he will have to forego the tax advantages. While Section 80C has enough options for him to save tax,Section 24 is only for home loan interest components. So let’s assume he has to let go of benefits under Section 24.
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She would have a $100,000 in capital gains and would be under the $250k limit you mentioned. Capital gains taxes are extremely low at 15% for the long-term outside of retirement accounts. So the savings should most definitely go into tax deferred accounts first.
Thirty year mortgages in this country quite often just let people buy houses they could not afford long term anyway. Good discussion and I’m glad this is still getting comments and looked at it. I can appreciate both sides and think about this often as I approach the time where I will be getting a mortgage.
Many people love the feeling of being debt-free, having the peace of mind of owning a valuable, tangible asset. Prepaying the principal of your mortgage can save both time and money. The following example shows how of each you could save if you prepay your mortgage on a $200,000 loan at a 4.75 percent interest rate on a 30-year fixed mortgage. It is totally not advisable to prepay your Home Loan unless you have your emergency fund in place. Financial advisers say that you need to have at least half of your annual salary as your emergency fund.
In both the cases, the investments for the surplus amount(if not used for pre-payment) has been taken for whole duration of loan. But if one prepays the amount, his overall tenure is also reduced along with the total interest saved. This means that total interest saved , when invested for the time we reduce from our total tenure, would have given more returns…if someone could do the exact calculation? The mortgage overpayment is the “safe” investment here — it’s effectively a guaranteed return. A reasonably wealthy person with a large portfolio will balance possible greater returns against the safe mortgage, and make a decision based on overall portfolio.
I will be able to cash flow my kid’s tuition and they will graduate college debt free. The benefit of paying additional principal on a mortgage isn’t just in reducing the monthly interest expense a tiny bit at a time. It comes from paying down your outstanding loan balance with additional mortgage principal payments, which slashes the total interest you’ll owe over the life of the loan.
In parts of the world where a full term fixed mortgage with a locked in interest rate over anywhere from 15 year to 30 years isn’t possible – the scenarios change with term renewals. Renewals based on changing interest rates 5, 10, 15, 20 years later could be significantly different then when the mortgage started. A 3% interest rate could be 5%, 7%, 10% at later renewals.
+ This also implies that 100% of your income is captured by the incremental mortgage payment if you go with shorter term. Depending on income and financial savvy-ness, people probably are also investing in stocks and some bonds as part of their PA or IRA. Some further exposure to real estate (i.e. accumulating equity in your home) isn’t wholly bad – especially when stock markets are hot.
Banks will usually cap your maximum EMI at about 50 per cent of your current monthly income. However you can make use of pay increases and bonuses to make part-prepayments on your loan. Getting an acknowledgement for your prepayment is essential for you to have a written proof of the fact that you’ve made a payment.
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