How to guide clients in paying off mortgage early

Paying off a mortgage early is a goal for many property buyers, and for good reason. It offers financial freedom and the peace of mind that comes with eliminating long-term debt. The thought of paying off a mortgage ahead of schedule can seem intimidating. But it can be one of the most beneficial financial decisions your clients can make. 

In this article, Mortgage Professional America will explore the reasons why paying off a mortgage early can benefit your clients. We will also discuss other valuable insights such as its impact on property taxes and downsides. 

What is the 2% rule for paying off a mortgage?  

The 2 percent rule for paying off a mortgage is a simple strategy that can reduce the length of the mortgage term and save interest. The rule suggests that if your clients add an extra 2 percent to their regular monthly mortgage payment, they can reduce the total interest. They might also be able to pay off the mortgage in 12 to 15 years less, depending on the loan balance and interest rate. 

For example, if their mortgage payment is $3,000 per month, adding an extra 2 percent or $60 each month could help pay off the mortgage earlier. The main idea is that small extra payments can have a big impact on the mortgage's principal balance, speeding up the payoff process. 

Watch this short clip to learn more about this rule: 

If you wish to be one of the best mortgage brokers out there, you might want to share this rule with your clients. Help them decide whether paying off their mortgage sooner is a wise decision. 

Is it smart to pay off your mortgage early?   

To answer this question, here are two benefits to paying off mortgage early: 

1. free up cash 
2. save on long-term interest  

Here is a closer look at these benefits: 

1. Free up cash 

Obviously, if your clients choose to pay off their home loan early, it’ll free up a lot of money for them. Without the monthly mortgage payments, they’ll have more disposable income. This extra money can be redirected into home improvement. It can also be used for other investments that might offer a higher return, such as: 

• retirement savings 
• stocks and bonds 
• commercial real estate 

Over time, this strategy can provide more financial flexibility than continuing to make mortgage payments. As a mortgage broker, you can help your clients assess whether paying off their mortgage early is the best option. You can also advise them that investing their extra money elsewhere might offer better long-term benefits. 

In some cases, paying off a mortgage early can also help clients prioritize reducing high-interest debt, such as credit card balances. With the average credit card interest rate currently over 20 percent, your clients might want to use those extra funds to pay down credit card debt. This can be a better financial move than accelerating mortgage repayment. For those with high-interest debt, refinancing might be a more suitable option. 

2. Save on long-term interest 

Paying off mortgage early can help your clients save money on interest, especially if they have a substantial balance remaining. Let’s say one client has a 30-year mortgage of $300,000 with a 5 percent interest rate. After 20 years, they still owe around $152,000 on the property loan. 

If they continued with the original payment plan, they would pay around $280,000 in interest over the full term of the mortgage. However, if they received a lump sum and paid off the mortgage 10 years early, their total interest cost would drop to about $238,000. This would save them over 14 percent in interest—more than $40,000. 

As a mortgage broker, you can aid your clients in realizing how paying off their mortgage early could save them money and bring them closer to financial freedom. However, keep in mind that these savings depend on numerous factors such as: 

• mortgage rate 
• loan balance 
• remaining term 

Aside from the peace of mind that your clients can enjoy when they’re finally debt-free, here are other reasons why settling their mortgage soon can be a great decision: 

Downsides of paying off mortgage early 

While it might be tempting to pay off mortgage early—especially if your clients have the money to do so—there are still some risks to consider. As such, you must tell your clients that this option is not necessarily the right move for every homeowner. 

Here are two downsides that they should consider before paying off mortgage early: 

1. lost tax deduction  
2. prepayment penalty 

Let’s take a closer look at each: 

1. Lost tax deduction 

As homeowners, your clients have many tax advantages. One of the most notable perks is mortgage interest deduction. This tax incentive allows them to deduct the interest paid on the first $1 million of mortgage debt. For homes purchased after December 15, 2017, the deduction applies to the first $750,000 of mortgage debt. 

The mortgage interest deduction can lower their taxable income. This means that the amount they paid in mortgage interest can be subtracted from their income, potentially reducing their tax bill. However, if your clients pay off their mortgage early, they forgo this deduction. This could result in an increase in their taxable income. 

This deduction is available only if your clients itemize their deductions on their tax return. Others can always go for the standard deduction. 

2. Prepayment penalty 

Another downside to paying off mortgage early is the potential prepayment penalties. Because it eats into their ability to make a profit, mortgage lenders charge fees when your clients pay their home loan sooner than expected. While prepayment penalty fees can vary, most are a small percentage of the outstanding loan balance.  

These penalties are charged if your clients are early on in their mortgage term, such as the first few years. However, not all banks and mortgage lenders will charge prepayment penalties. As a precautionary measure, advise your clients to double-check with their mortgage provider if they want to settle their mortgage early. 

Watch this video to know more about its disadvantages: 

Spending emergency savings 

While paying off your mortgage early might give your clients peace of mind, remind them that it could deplete their emergency savings. This is especially true if they use all their reserve funds to pay off the home loan. 

If they have a sudden change in finances or lose their source of income, this could put them in a serious bind. Aside from helping them map out their financial plans, you can also advise your clients to consult a financial adviser if they're having doubts. 

Having good relations with related industry professionals wouldn’t hurt and it can even give you referrals in the long run. 

Do your property taxes go up when you pay off your house? 

Paying off a mortgage does not directly impact property taxes. Property taxes are determined based on the assessed value of the property, not the outstanding mortgage balance. This means that even though homeowners no longer have a mortgage payment, their property taxes remain linked to the market value of their home. 

However, paying off the mortgage could indirectly affect property taxes if it triggers a reassessment. In some cases, if the home’s value has increased, the local authorities might reassess the property’s value. This can lead to an increase in property taxes. 

Mortgage brokers should explain this distinction to their clients. You should help them understand that paying off the mortgage won’t automatically raise their taxes, but other factors might cause an increase in property assessments. 

How mortgage brokers can help 

Your guidance and support can have a huge impact on whether your clients decide to pay off their mortgage early. It's vital to explain the impact of early repayment and make sure that they aren’t making a hasty decision. 

While paying off a mortgage early can save on interest and provide peace of mind, homeowners should also consider other expenses—may it be short-term or long-term. Let them understand that having an emergency fund in place is a sign of financial maturity. Help them evaluate whether investing extra funds might provide a higher return than the interest saved on the mortgage. 

Finally, you should encourage your clients to do their own research to fully understand the benefits and challenges of early repayment. 

Are you guiding your clients to pay off their mortgages early? We’d love to hear your strategies and experiences. Feel free to share them in the comments below.