Own Your Home Sooner
A home mortgage is the largest monthly expense for most Americans. It’s also an expense that most people can look forward to paying for a long time — typically between 15 and 30 years. This can make the idea of paying off a home mortgage early very tempting.
Doing so can free up hundreds (or maybe thousands) of dollars a month that can be put toward other uses — whether saving for retirement or college, paying down other consumer debt, or simply spending on recreation or luxuries — and save tens of thousands of dollars in interest. Here are five strategies you may be able to implement to pay off your mortgage early.
1. Make a Mortgage Payment Every Other Week
By making biweekly mortgage payments instead of paying your mortgage once a month, you end up making two extra payments — or one full month’s extra payment — at the end of the year. (Fifty-two weeks in a year divided by 2 equals 26 payments, which divided by 2 is 13 months’ worth of payments instead of 12.)
Suppose your monthly mortgage payment is $2,000. If you make one mortgage payment a month, you’ll pay $24,000 toward your mortgage at the end of one year. But if you pay $1,000 every other week, you’ll pay $26,000 toward your mortgage at the end of the year. This extra $2,000 can be applied directly to your principal, thus reducing the term of your mortgage.
2. Make Lump-Sum Payments Toward Your Mortgage
Assuming there are no prepayment penalties, you can pay extra money on your mortgage and have it applied to your principal balance any time that you like. This gives you the flexibility to work on paying down your mortgage early when you have the extra funds to do so, without forcing you into a higher payment every month.
So if you receive bonus or commission checks, consider using some or all of the money to make lump-sum mortgage payments. The same goes for any financial windfalls you might encounter, like an inheritance or large gift.
3. Refinance into a Shorter-Term Mortgage
This has become a popular strategy in recent years as interest rates have fallen, because lower rates make it easier for homeowners to absorb the higher monthly payments that accompany shorter-term mortgages.
For example, if you secured a 30-year, $250,000 mortgage five years ago with an interest rate of 6.5 percent, your monthly principal and interest payment is $1,580. But you’ve discovered that today, you can lower your interest rate to 4.5 percent if you refinance to a 15-year mortgage. While doing so would increase your monthly payment to $1,850, but if you can absorb the additional $270 a month, you’ll pay off your mortgage twice as fast — in 15 years instead of 30.
4. Increase Your Monthly Mortgage Payments
This is the same concept as the previous strategy, except that rather than refinancing into a shorter-term mortgage, you would simply write a bigger mortgage check each month on your own.
This strategy offers a couple of key advantages over refinancing. First, it gives you the flexibility to pay extra toward your mortgage during months when you can afford it without forcing you into a higher mortgage payment every month. Second, you save the cost of refinancing, which can be substantial, since your mortgage isn’t changing.
Keep in mind, however, that you will not benefit from a lower interest rate like you probably would by refinancing from a 30-year to a 15-year mortgage.
5. Refinance at a Lower Interest Rate But Maintain the Same Monthly Payment
This is kind of a hybrid between the previous two strategies. It could be a good solution if you have an opportunity to lower your mortgage’s interest rate but can’t afford the higher monthly payments that result from switching from a 30-year to a 15-year mortgage.
For example, let’s say you obtained a 30-year, $250,000 mortgage three years ago with an interest rate of 6.5 percent, so your monthly principal and interest payment is $1,580. But you’ve discovered that you can now get a 30-year mortgage for 5 percent, which would lower your monthly principal and interest payment to $1,340. Applying this extra $240 a month toward your principal instead of putting it in your pocket would shave years off the mortgage term.
Here are the 6 steps followed to pay off my mortgage faster
Should you pay off your mortgage early? Check this Scenario Out!!!!!!!!
It’s a question personal finance experts have been debating for years. Some say it makes financial sense to invest that money in the stock market, while others say you won’t ever regret being 100% debt free.
1Step 1: I BOUGHT A HOME I COULD AFFORD
If you want to finance a home, you’ll need to get prequalified first. The bank will look at your overall financial picture and spit out an amount that you’re likely to get a loan for. Some people use this number to set a housing budget, but not me. The bank is just guessing. I examined my monthly budget and determined what I wanted to spend on housing. It ended up being much less than what the bank told me I could afford.
2Step 2: I GOT A 15-YEAR MORTGAGE
I decided to calculate the difference between a 15-year mortgage and a 30-year one. Of course, a 15-year mortgage will always cost you more per month. The advantage is that you’ll save on interest charges because the term is shorter and the interest rate is lower. In my case, the interest rate for the 15-year loan was 0.75% lower than the 30-year mortgage.
3Step 3: I SET A TARGET PAYOFF DATE
Shortly after moving into my new condo, I used an online mortgage payoff calculator to set a payoff goal that would be both challenging and attainable. I posted reminders of my goal around the condo and let my close family and friends know about it so they could help hold me accountable.
4Step 4: I STARTED AUTOMATIC BIWEEKLY PAYMENTS
In order to speed up my mortgage payoff, I started automatic biweekly payments through my loan provider. I paid half of the monthly mortgage payment every 2 weeks. That’s basically the same as 13 monthly payments a year. My bank got the ball rolling on this for free, but some loan providers charge a fee. Give yours a call to talk over your options. (If you are being charged a fee, you can easily set up your own accelerated mortgage plan at no cost.)
5Step 5: I REDUCED EXPENSES AND INCREASED EARNINGS
I reviewed my budget from top to bottom to find ways to reduce expenses and increase my earnings. This is how I learned to sweat the small stuff because all of those credit and debit card purchases really add up!
Here are a few ways I saved:
- Cut cable service – Saved $600/year
- Switched car insurance providers – Saved $480/year
- Packed my lunch – Saved $1,000/year
- Made coffee at home – Saved $500/year
- Stopped buying new clothes – Saved $1,200/year
I also volunteered for extra shifts at the office, waited tables part-time, and picked up pet sitting gigs on Craigslist to make more money. I used all of my extra income, including tax refunds and work bonuses, to prepay the mortgage.
6Step 6: I REWARDED MY SUCCESS
I never felt deprived throughout the mortgage payoff process because I rewarded myself along the way. For every $5,000 I knocked off my mortgage, I allowed myself $100 to spend on whatever I wanted. Sometimes I didn’t even use that money because I was so focused on reaching my goal. When I sent my final mortgage payment to the bank in December 2012, I booked a vacation to celebrate my freedom from debt.
Whether you plan to pay off your mortgage early or not, some of these steps can be applied to other types of debt. It all boils down to hard work. As a middle-class professional, it is not easy. It required discipline, organization and most importantly, the right attitude.