Recently, I got some extra cash and am planning to throw it into my mortgage to pay off a bit in advance.
Regarding early repayment, the opinions of many people have become quite unified over the past two years. For someone like me, with a commercial loan, LRP + 120 basis points, and a direct annual interest rate of 5.4%, early repayment is equivalent to an investment, especially since a US dollar fixed deposit can't achieve 5.4% this year!
The core of the debate is that many people, through various calculators, believe that paying off the loan early to shorten the term can save more interest.
The last time I made an early repayment, I was also indecisive, but as my understanding has improved, I've realized that this is simply a false proposition. For most ordinary people, there is no doubt, just reduce the monthly payment and forget about using calculators. The reasons are summarized as follows.
If the monthly payment has no impact on you, like a monthly mortgage of $1,000... then really, paying off a bit early makes no difference. If the real goal is "saving on interest," then just pay it off in one go. If your goal is "tax deduction," then you definitely should not "shorten the term" but should extend it to the full 30 years instead.
Moreover, when there is some extra cash, it's for making partial repayments. Since it's "partial repayment," it means "lack of funds," needing to keep some liquid assets without wanting the repayment pressure to be too high. So, making early partial repayments to reduce the monthly payment, isn't that the right logic?
Many people use a calculator and say, "Ah! Paying off 100,000 early shortened the term by five years, saving so much interest." Please! Your loan term has shortened, of course, you’ll pay less interest! Let's face it, if you initially chose a 30-year loan instead of a 20-year loan, wasn’t it because of "lack of funds"?
Others say, by shortening the term and keeping the monthly payments the same, you can force yourself to make further early repayments and save on interest. Otherwise, the part of the monthly payment you don’t pay, isn’t that just going on eating and drinking?
Friend, isn’t living all about making things better for yourself? If you spend on eating and drinking, doesn’t it mean you’ve improved your life through your efforts in making early repayments? Why must you keep yourself busy for such a long time?
Moreover, if the money for your next early repayment has to come from saving on "eating and drinking," it means you're not living "well." Better to reduce the monthly payments and make your life "better"!
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