Pros & Cons of Paying Off your Mortgage Early

“Is it a good idea to pay off my mortgage early?” … Many homeowners ask themselves every day. The thought of eliminating your monthly mortgage payment can be appealing to most anyone.

No one in their right mind enjoys writing that fat check to the mortgage lender month after month if they don’t have to. However, like with all major financial decisions, it’s important to consider every angle before you decide to pay off your mortgage early.

Although paying your house off early will save you a ton of money on interest, you should also be aware of the risks involved and make sure the benefits outweigh the risks.

Once you are fully aware of the pros & cons, you can then make an educated decision on whether or not it’s a good idea for you to pay your mortgage off early.

The idea of paying off your mortgage early is a no-brainer at first glance. But when you’re talking about retirement planning financial management overall should be carefully planned.

Consider what your goals are personally and financially before making decisions that are in your best interest. If you have a low-interest rate on your mortgage loan, it could make more sense to hold on to your money or invest it elsewhere if you can make more interest on it like investing in real estate.

Since this is a major financial decision, it’s a good idea to consult with a financial advisor before deciding anything. Financial advisors are trained to identify potential risks and rewards depending on your situation.

More and more we’re seeing lenders offer homeowners more flexible loan terms because they know that it benefits them tremendously. This is why homeowners now more than ever are customizing their home loans.

This information will help you to understand the most common benefits as well as the disadvantages of paying off your mortgage early.

Paying off your mortgage early: the PROS

These are the most common reasons why a homeowner would want to pay their mortgage off early.

Eliminate a huge financial burden from your life

Do you ever think of how great it would be to be mortgage-free? Of course, you do… every homeowner does. The truth is that most homeowners have a mortgage on their homes.

Paying your mortgage off in full is extremely liberating and will probably help you sleep better at night. Even for people who don’t have financial worries, it’s still a great feeling to say you own your home free and clear.

Making additional payments towards your principal doesn’t always make financial sense. This is something you need to determine if it makes sense for you.

Many homeowners think about paying their mortgage in full as they head into their retirement years. The last thing a retiree wants is to make monthly payments when they no longer have a steady income.

Ridding yourself of that mortgage payment can make sense if you wish to eliminate that financial burden.

You don’t have to factor in the cost of your Mortgage when considering other Investments.

Investing your hard-earned money is like a balancing act that demands careful planning. A mortgage is usually the biggest loan you’ve ever taken out and when you add up the interest you’ve paid out over the years and even decades, you’ll probably be surprised…. not in a good way.

Whether you have a mortgage or not, you should invest in a 401k or IRA investment account. Look at it this way… If you’re making more money on interest on a particular investment, it should exceed the interest that you’re paying on your mortgage to make sense… Make sense?

If not, then you’re probably better off paying off your mortgage early. However, if your home was paid in full then you would no longer need to weigh your investments against your mortgage- because you are no longer paying interest on the mortgage.

If loans are cheap like they are right now with extremely low-interest rates, then it probably makes more sense to just keep your current mortgage. However, if you’re stuck in a high-interest rate mortgage, then paying off your loan early probably makes more sense.

If you have a high-interest rate on your mortgage right now and still wish to keep your loan, then you should consider refinancing.

You can make less risky investments with your money

Once your mortgage has been paid off, you will be able to use the money you were paying on your mortgage to invest in safer investments.

I’m not saying your home is a high-risk investment because it usually isn’t. But, let’s not forget what happened when the market crashed back in 2007- 2008 when home values dropped and many homes were worth less than half of their original value. Chances are this won’t happen again for a long time… hopefully never, but there’s always that chance.

You can make higher-risk investments

Bank-insured certificates of deposits and treasury securities are low-risk, low-yield investments. You can choose to diversify your investment portfolio by investing in stocks that are at higher risk but also have higher rewards.

If this is something that you’re interested in, speak to a financial advisor about long-term investment strategies once you’ve paid off your mortgage. The stock market can be a great place to invest your money wisely.

You can free up some extra cash-flow

Once you don’t have a mortgage payment to make each month, it will free up some extra cash for you and your family each month. By having more cash left over every month, your stress level will decrease substantially and you can handle any unexpected costs that come your way.

No more paying PMI

The majority of major lenders will require you to have private mortgage insurance [PMI] until you have at least 20% equity in your property. By paying PMI you’re not only throwing away a substantial of money every year, but it offers no benefits to the homeowner.

The sole purpose of private mortgage insurance is to protect the lender from default and nothing else.

Convert your equity into cash

The larger the amount you pay towards your mortgage, the more equity you will have in your home. This put you in a position to leverage that equity if you want or need to for some reason. You can also get a HELOC [home equity line of credit]. It’s not like taking out another mortgage or else what would be the point of paying it off in the first place. A home equity line of credit is just that… a line of credit, when you need it, you use it, then pay it back.

Paying off your mortgage early: the CONS

Here are some reasons why you may not want to pay your mortgage early

When we talk about liquidity, it refers to how easy it is to access the money you have. The more cash you have into our home, the less liquidity you have.

Just think if an emergency popped up when you least expect it and you needed cash… fast! You’d have to either access some cash from another account if you had one, or you could get a home equity line of credit or “equity loan” on your home.

I believe it’s a great idea for any homeowner with a free and clear house to get a home equity line of credit. It doesn’t cost anything to have a home equity line of credit until you use some of the money, then you have to make interest payments. Once you’ve paid it back, you’re back to no payments… and it’s there whenever you need it. I’ve bought and continue to buy homes in Orlando using my HELOC because I can access the cash quickly and I can close on an investment home within a few days. It’s much cheaper than using a hard money lender and so much more convenient.

It comes down to you and what your needs are… you need to decide if it’s more important to have access to extra cash quickly when you need it or… would you rather be mortgage-free.

Generally, people who pay their mortgage off early don’t have any worries about having extra cash because they already have plenty.

Losing tax deductions on interest- If you’re currently paying on a mortgage you can deduct the interest payments on your home loan when you file your taxes.

This means you get more money back every year solely because of the money you pay towards interest on your loan. The moment your home is paid off, you will lose those deductions. Recently the amount of interest you can deduct is less than what it used to be.

Now when you own a homestead property, you can only claim a deduction for the interest on a mortgage loan for up to $750,000 if you’re married and $375,000 if you’re married filing with separate status. These new guidelines are in place until 2025. It used to be the debt limits were $1,000,000 and $500,000 under the old tax laws.

Also under the old tax code, you were able to deduct up to $100,000 to $50,000 of your HELOC loan. No mas…

Depending on when this article was published, you should see what the latest tax laws are and factor them into your decision.

Carrying a mortgage these days has become less and less appealing when it comes to the new tax laws. There are a lot fewer tax breaks for homeowners.

You might ding your credit score- Your “credit mix” is one of the factors taken into consideration when credit companies determine your credit score. It comes down to the different loans you have at the time and having several loans and credit lines in good standing will help your credit score.

When you no longer have a mortgage payment, your credit score may take a small hit.

Your particular credit mix contributes 10% of your overall credit score. When other creditors see you paying on a mortgage every month, it’s a good thing. This is how they determine your viability as a borrower, it’s great when they see you making all your payments on time month after month.

You can’t make other investments Paying off a mortgage in full will probably use up the majority if not all of our liquid cash. That means you’ve made a huge investment in your home when you may have been able to get a higher return on some other investment… like buying an investment home for example.

FAQ’S ON PAYING A MORTGAGE OFF EARLY

What’s the average age someone should pay their mortgage off? Financial experts recommend you have your mortgage paid off in your 50’s.

What’s the most substantial downside to paying your mortgage loan off early? The biggest downside of paying your mortgage off early is the reduction in liquidity. It’s a good idea to apply for a home equity line of credit so you can have access to quick cash when you need it.

What if I only pay an extra $100 per month? Will it make a difference? It will make a difference! By paying that extra hundred bucks a month towards the principal you’ll cut off at least a couple of years on the life of your loan.

Will extra payments automatically go towards my principal? Not necessarily… make sure to let your lender know the extra funds should be applied to the principal balance of your loan. You should also put it in the memo section of the check or online payment.

If I pay off my mortgage early, what happens next? After you’ve paid off your mortgage, your lender should send you the original promissory note with those beautiful words stamped on it… PAID IN FULL.

By paying off my mortgage, will it affect the amount of income tax I pay? Unfortunately, yes. Once you’ve paid off your mortgage, you won’t qualify for a tax deduction. This was one of the arguments listed in the con section above.

What is the best way to pay off my mortgage early? You have a couple of options on how to pay your mortgage off early. You can either pay it off in one lump sum for the entire amount or you can make extra payments every month towards the principal balance of your loan. Make sure your lender knows what that extra money is for.

What’s better… a 15-year mortgage? OR, make extra payments on a 30-year mortgage? This depends on how much you can afford to pay each month. For example, a fifteen-year mortgage loan will come with a lower interest rate and if you can afford that, then do it. However, if you know you have some big bills headed your way like putting your kids through college, then you may want to stick with the lower payment instead.

Final thoughts on paying off a mortgage early

There is no right or wrong answer when it comes to deciding to pay off your mortgage early. It comes down to your financial situation and what you see happening in your future.

Don’t rush into anything before deciding as important as this one. Consulting with a financial advisor is highly recommended in addition to doing some research on your own.

I hope this article helped you to have a better understanding of the pros and cons of paying off your mortgage early.

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Closing Costs…Who Pays What?

Closing Costs

The typical seller believes that once they pay off their loan and pay their Orlando realtor whatever commission was agreed upon then they get the rest of what’s left over. Very few homeowners give much thought to closing costs. When we say closing costs, we are referring to all the taxes, fees and costs that are necessary to close a real estate transaction.

 

In the state of Florida, closing costs are usually split 50/50 between buyer and seller. However, like my 1st real estate teacher told me “everything in real estate in negotiable”, so nothing is set in stone when it comes to a real estate transaction. Hopefully you’ve hired an experienced Orlando realtor who is also a tough negotiator.

 

Your agent should be able to tell in advance you what you should expect to pay on the day of the closing. Once you have all the pertinent information, you will easily be able to calculate what your net proceeds will be.

 

Like I said before, it’s typical in the state of Florida for both buyer and seller to pay equal shares of the closing costs. Sometimes the market can dictate who pays for what depending on if it’s a buyers or sellers market. For example… If it’s a seller’s market, the seller may require the buyer to pay a larger portion than usual.  By the same token, if it’s a buyer’s market, the buyer may require the seller to pay the lion’s share of the closing costs… or even all the closing costs.

 

From our experience as realtors in Orlando, it’s very common for buyers to include all of their closing costs in their offer so that they don’t have to come out of pocket at the closing.

 

These are some typical closing costs on a FL real estate transaction:

  • Escrow Fees: In Florida, it’s not required for a lawyer to handle the closing of a RE transaction. Title companies [sometimes owned by attorneys] are usually the ones who handle closings as well as any escrows. These fees are typically shared equally by both parties.
  • Title Insurance: There are 2 types of title insurance that must be purchased, the owners’ policy and the lenders’ policy. The seller is typically responsible to pay the owners’ policy and the buyer is responsible for the lenders’ policy. Both these policies are in place to protect the lender as well the lender as well as the new owner by making sure there are no liens or other encumbrances attached to the property aka “clearing title”.
  • Transfer Taxes & Documentary Stamps: These are fees that are paid to the city, state and county in which the property is located in. This is where Uncle Sam gets his cut of the deal and is also referred to as a reconveyance tax.
  • Recording Fees: This is a fee paid to the county for recording the deed to the property making it official.
  • Mortgage Tax: This is a tax collected by the state of Florida.
  • Settlement Fees: Also usually shared by buyer and seller. This is the cost that the title company charges to handle any of the financial transfers which occur during the transaction.
  • Brokers Commission: This is the fee that the seller agreed to pay his Orlando listing agent for selling the home.
  • Pest Inspections: Lenders usually require for a pest inspection to be performed on the property to make sure that it’s in good condition and hasn’t been damaged by any living organisms. If the report reveals that there is evidence of termites, carpenter ants, fungus or dry rot, the seller will usually have to correct the problem before closing the transaction. The seller will usually pay for this directly to the company making the repairs which means it won’t appear on the settlement statement.

 

Buyers will typically be responsible for additional fees which are mostly tied to their mortgage loan. Sellers are also responsible for some additional costs like the mortgage interest on their loan, unpaid property taxes, unpaid association dues, hazard insurance, etc.  The seller is responsible to pay these fees up until the closing of the transaction… and the buyer from then on. If the seller has already paid for some of these items past the closing date, they will be reimbursed at the closing. Other miscellaneous items like home warranties that the seller may have agreed to pay for will also be deducted from the seller’s proceeds.

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6 Reasons A Mortgage Is Denied After Pre-Approval

6 reasons a mortgage is denied after pre-approval

Before you go house shopping in Orlando, the most important thing to do is get pre-approved for a mortgage.

With a pre-approval letter in-hand, you’ll know how much you can afford to pay for a house.

This amount of the loan you get approved for is determined by your lender based on your income, your expenses, how much you can afford as a down payment and your credit.

The whole pre-approval process is something that every potential home buyer goes through when applying for a loan.

Most people think that once you get pre-approved all you have left to do is find a house to buy and proceed to closing.

Unfortunately, this isn’t always the case and some buyers are given a rude awakening when they go to get their mortgage.

Sometimes, even though the buyer was pre-approved, the bank refuses to sign off on the loan.

After working as a real estate agent in Orlando for the past twelve years, I can give you some tips on what to watch out for and how to avoid the pitfalls of getting denied for a loan after you’ve been pre-approved.

These are the most common reasons loans get denied after they’ve been pre-approved

1- A Change in Loan Requirements

Sometimes lenders can change their requirements for mortgages without any notice. For example, a bank may have had a minimum credit score requirement of 625, but for some reason they increased it to 675.

Although you may have already been pre-approved under the original guidelines, but when you went to get the loan, the requirements have just changed. In this situation there isn’t much you can do here except go to another lender.

2-Taking On More Debt

When you get pre-approved, it’s based on your current situation. A portion of the lender’s criteria is the amount of debt you are carrying at the time of your mortgage application. If the buyer accumulates more debt after they’ve been pre-approved for loan, it can cause their pre-approval status to vanish into thin air.

A good mortgage broker will advise you on the do’s and don’ts of accumulating more debt while going through the loan application process.

3- Changing Jobs

One of the most important items in determining your eligibility for a loan is your employment. The bank needs to know that you’re financially capable of making your mortgage payment every month and they will put your employment history and income under the microscope.

If for some reason you change jobs during the mortgage application process then you’re taking a chance that the lender may drop you like a hot potato. It’s best to try and remain at the same job while your mortgage loan is being processed so that you don’t throw up any red flags.

Certain loan programs like FHA for instance, require the buyer to be at the same job for a minimum of 2 years. It’s best to discuss any possible job change with your mortgage advisor before making any drastic changes.

4- Negative Hits to your Credit

Someone’s credit rating can change on a regular basis because of several different factors. Failing to make a payment on time or taking on additional debt can negatively affect your credit score almost instantly.

If this happens during your loan application…. even after you’ve been pre-approved, it can cause you to be denied for a mortgage.

5- Appraisal Comes In Too Low

In most Orlando real estate transactions, the appraisal value of a home is a “do or die” piece of the puzzle. In other words, if the appraisal comes in lower than the purchase amount there are two things that can happen at that point. Number 1, the seller can lower the sale price of the home to match the appraisal value or…B, the seller refuses to lower the price and you continue home shopping.

6- Fraudulent Documentation

Although highly uncommon these days, it still does happen from time to time. This is when a borrower intentionally gives their lender falsified documentation at the time of the mortgage application.

At some point during the process when the lender finds out the buyer committed mortgage fraud, they will cancel the application in a heartbeat.

Protect yourself from being denied after being pre-approved

In some situations things can be out of our control however it is possible to avoid many of the above mentioned situations. The best thing you can do is educate yourself on how FICO scores work and avoid doing anything that can negatively impact your credit rating.

Seek guidance from your Orlando realtor or your mortgage adviser before making any hasty spending or employment decisions so you can avoid any road blocks that could keep you from getting a home loan.

Buy a  Home Orlando FL

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Getting Pre-Approved For A Mortgage

Getting Pre-approvedThe pre-approval process is a huge benefit both to buyers as well as Orlando real estate agents, primarily because it lets you know up front how much you qualify for, so you don’t have to waste time looking at homes you cannot afford.

 

Getting Preapproved also gives is us peace of mind. I mean you now have a document in writing that states the amount of money that a lender will loan you on the house of your choosing.

 

Shopping for a home knowing that you’re preapproved for a mortgage is a whole different feeling than if you’re just out window shopping. Now, when you’re out looking at homes with your Orlando realtor, you know that it’s for real. When you find a home you really like, you now know that you could actually end up with it.

 

What Do You Need To Get Pre-Approved

 

The first thing you’ll want to do is actually meet with your mortgage banker or lending institution. After running a credit check on you they’ll look at your income, your assets, if you’re receiving down payment assistance from a family member, whether it’s a loan or a gift, etc. They will also want to look at your rental history because that kind of information gives them an indicator of what would happen, once you do have a mortgage.

 

When you approach a bank or a mortgage broker it’s best to have your paperwork ready for them. Typically they need pay stubs, bank statements, as well as the last two years of your tax returns. People that are self employed will need to provide a profit and loss statement. If you earn multiple streams of income other than your job like from a rental property for example, you should also include it.

Before pre-approving you for a mortgage, the lender will want to ensure that you don’t have a lot of outstanding debt, whether it’s student loans, or credit cards, car loans, etc.

 

Not everyone takes the time and effort to go through the pre-approval process before going house shopping, but we definitely recommend it. The Orlando real estate market is very competitive these days so it’s best to be prepared before launching your home shopping campaign. It can be heartbreaking to find the home of your dreams, then lose it to another buyer because you weren’t prepared and they were.

 

When a potential buyer goes through the preapproval process it shows the listing agent for the property as well as the seller that you are a serious buyer.

John Conde Orlando Realtor

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TOR 022 : Loan Modifications Exposed!

ORLANDO REALTOR PODCASTLoan modifications have helped tens of thousands of Orlando homeowners to keep their homes in recent years. However, with Loan Modifications, you have to be aware of the fine print and know exactly what you’re getting yourself into.

Sometimes…terms of a loan mod are much worse than the original mortgage. They just try to sugar coat it to make it look good.

Here’s a recap of today’s episode. Hit the play button to get the full scoop!

 

 5 things you should watch out for when negotiating a loan modification:

 1-“Your lender’s in charge of the loan, which means they have the option of dropping all penalties against you. Don’t be bullied….. ”

2- “This may sound funny but it happens. Sometimes lenders try to get you to agree that if they lose the original loan docs, you must assist them in reproducing them….”

3- “Don’t agree to step by step rate increases or balloon payments…..”

4- “Don’t agree to payments you can’t afford. The whole purpose for doing a loan mod is….” 

5- “Don’t agree to an interest rate that can automatically adjust based on an index over which… ”

 

” An Orlando Short Sale may be your best option!”

 

 “By doing a short sale you’ll be free of your lender forever, and you can get enough cash back from the sale to get a fresh start.”

“If you’re interested in getting more information about loan modifications or short sales call us or visit or site to set up a free consultation”

“we’ll meet with you to discuss the details of your situation to come up with a plan of action that works best for you.”

“I hope this information was helpful to someone out there. If so, please take a moment to write a review and rate the show on i tunes, it would be greatly appreciated.”

“Please keep those questions coming, just visit the ORC site to submit a question or topic and we’ll do our best to talk about it on the show.”

“Thanks for listening everyone, we’ll see you next time!”

 

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