7 Ways to Pay Off Your Mortgage Early
A mortgage is an excellent financial product to utilize while buying a home. It provides million of Americans with the opportunity of making the dream of homeownership become a reality. However, being a homeowner and having a mortgage do not need to be synonymous. In fact, 34% of homeowners do not have a mortgage on their property. Paying off your mortgage before its full amortization is indeed possible. The following are 7 ways to pay off your mortgage early.
1- Refinance to a Shorter Term
Refinancing your mortgage is one way to pay off your mortgage and be debt free sooner. You can refinance your mortgage to a shorter term and lower interest rate. This option will require you to make a larger payment than what you are currently paying. The savings in interest will be significant, and you’ll cut your mortgage down by years.
2-Refinance to a Lower Rate and Continue Making Higher Payments
Refinancing to a lower interest rate will also help to pay off your mortgage sooner. Once you’ve refinanced, continue making the same mortgage payment you have been making all along. Whatever extra you are paying on your mortgage will be directly applied toward your principal balance. Ultimately, you will end up paying less in interest and pay if off sooner.
Make sure you don’t extend your term by refinancing. If you’ve paid on your 30-year loan for five years, don’t refinance to another thirty-year loan even if the rate is lower. Speak with your lender about getting a shorter term. Otherwise, you will pay more interest and be extending the amount of time until you pay off your mortgage.
While refinancing is a great option to pay off your mortgage sooner, it may not always be in your best interest. Consider the following scenarios to determine if you should refinance your mortgage.
Don’t Refinance Your Mortgage If:
3- Make One Extra Payment Each Year
Making one extra payment toward your principal balance each year will shave ten years from your mortgage loan. There are several ways you can make the extra payment. If you don’t think you can afford to make it all at once, try to break it down. Divide one extra payment over 12 months and add that amount onto your regular monthly payment.
4- Apply for Your Extra Paycheck Toward Your Mortgage
Many people get paid every two weeks, or 26 times each year. Most months you’ll receive two paychecks, but twice a year you’ll receive 3 in one month. With some careful budgeting, you can allocate your entire extra paycheck toward your mortgage.
5- Apply Any “Extra” Money Toward Your Principal Balance
Anytime you receive any “extra money” throughout the year make a payment directly toward your principal balance. There are several different types of windfalls you may come across. Use money from an escrow refund, a tax refund or work bonuses as a way to pay down your mortgage.
6- Setup Biweekly Payments
One of the most popular ways to pay off a mortgage early is to set up biweekly payments. Biweekly payments take your monthly payment and divide it in half, and that amount is paid every two weeks. Making biweekly payments means you will make 26 half payments or 13 full payments each year. Many lenders allow borrowers to set up biweekly payments on their loans. Don’t set up biweekly payments with your lender if they want to charge a fee to set it up. Calculate how much you’d pay biweekly and send that amount in on your own.
7- Apply Other Debt Payments To Your Mortgage
If you have any debt outside of your mortgage it is advisable you pay off those balances before concentrating on your mortgage. After you’ve paid off any consumer debts or school loans, apply those monthly payments toward your mortgage. Since you are already comfortable making those payments every month, add them onto what you’re paying on your mortgage. This will help you to add a few hundred dollars each month to your payments and save thousands over the life of your loan.
You can also consider consolidating consumer debts into your mortgage and make a larger payment toward your mortgage. After consolidating all of your debts into a refinanced mortgage, the payment will be less than all of your previous debt payments combined. Continue paying the cumulative amount you were paying on all of your loans combined. Your consumer debts will be at a lower interest rate, and you’ll be able to make traction in paying off all of your debts sooner. This may sound counterintuitive, but it can work if done properly. If you are concerned, you will accrue more consumer debt than stay away from this strategy.
How to Be Successful Paying Off Your Mortgage Early
When you send in any money above your normal monthly payment, be sure to mark “apply directly toward principal” in the memo line. Otherwise, the lender may take the money and hold it is a suspense account to be applied toward future payments. Indicate that the money should go directly toward the principal balance to reduce the amount of interest you pay overall.
Set goals for your mortgage payoff. Mortgages are not a small loan to pay off. It can get discouraging overtime, and you may feel like you are not making enough traction. Set goals to keep you motivated throughout the process.
Try these techniques for setting goals:
When You Shouldn’t Be Concerned About Paying Off Your Mortgage Early
There are a few circumstances in which you should not be worried about paying off your mortgage earlier. If you currently have any high-interest debt other than your mortgage, you should have you focus on eliminating that debt. After paying off any consumer debt, you can then turn your attention to paying off your mortgage.
Additionally, you should strive to have a healthy savings account in place before trying to pay off your mortgage earlier. Life’s emergencies will happen, and you’ll want to be protected when they do. Have at least 3-6 months worth of living expenses saved for a rainy day before applying extra payments toward your mortgage.
Being a homeowner does not mean you have to be in debt for 30 years. There are several ways to apply extra payments toward your mortgage loan. There are also many benefits to paying off your loan early. Whether you sell your home or stay in it, minimizing your mortgage amount will help maintain your financial health.