Buying and owning a home is part of the American dream and is probably the biggest investment. It can be a huge drain on your monthly budget and prevent you from retiring early, taking a dream vacation or even sending kids to college.
The idea of paying off the mortgage debt can be daunting and may sound like an uphill battle that you cannot win. But, if you follow these seven expert tips you will be able to shave years of your home loan and save tens of thousands of dollars on your interest payments. Your dream of a debt-free lifestyle will turn into reality.
You can pay off your mortgage loan early by creating a biweekly payment plan. Jack Guttenberg explains the biweekly mortgage payment plan as “one that a borrower makes equal to half the fully amortizing payment every two weeks.”
Many people default by paying a mortgage payment monthly, but if you switch to biweekly payments you will be effectively making one extra month’s payment per year. There are 52 weeks in a year and a biweekly payment schedule means that you are paying 13 full sized payments a year instead of the normal 12. It will have the same impact on your budget as one monthly payment without you even “feeling” it. This will result in a significant shortening of the period of paying off the loan. For example, if you convert a 4 percent 30-year mortgage to biweekly payments you would pay off the loan in 310 months or 25 years, 10 months.
If your lender does not allow you to switch to biweekly payments then you can automatically transfer the money from your checking account to a savings account every two weeks and then transfer the full monthly payment every month to your lender. At the end of the year, you will have one extra payment that you can put towards your principle.
The most effective way to pay off your mortgage early is to refinance your mortgage to a shorter-term. If you know of a more competitive mortgage rate you should talk to your broker about refinancing. These loans usually have interest rates a quarter to three-quarters of a percentage point lower than a 30-year mortgage. It will not only reduce your loan term significantly but also help you to save thousands in interest even after exit fees and other costs are taken into account.
You can use a mortgage calculator to see how much you would have to pay for a 15-year refinance. If the monthly payment is more than what you can afford then you can consider a 20-year loan instead. But be careful of break costs and exit fees. You should weigh up whether a new mortgage with a lower interest rate would really help you save money.
If you have the means, the easiest way to pay off your mortgage faster is by making an extra payment every year. One way to do this is to automatically transfer 1/12 of the payment each month into a savings sub-account earmarked as “extra mortgage payment”. Then you can make the extra payment after every twelve months. These extra payments will be applied to your principle and not interest. By doing this you will not have to pay interest each month on that principle but it will also help you lower your mortgage term. For example, say you start the very first year after getting a 30-year mortgage for $200,000 at 4.5%. This would save you more than $27,000 interest and you will be paying off the mortgage four years and three months earlier.
Sometimes small can be sweet. If paying larger payments is not feasible then you can always round up each of your mortgage payments. Mortgage payments are wacky numbers like say $1,486.72 and if you round it up to $1,490(less than $4 per month) or even to $1,500 you probably will hardly notice the difference in your day-to-day expenses. But it can shave years of the balance due and some hundreds of dollars in interest costs.
Moreover, by rounding off your mortgage payment to an even number can make your financial calculations like your household budget more convenient and easier to calculate. You will not need a spreadsheet or calculator and it will also offer a “feel good” aspect. It will make you feel more confident about your finances and encourage you to make similar changes in other spheres of your financial life.
A word of caution: You should check with your lender to make sure that the extra contribution applies to your principle and not to interest or next month’s payment.
Investor and writer Dan Dzombak says, “The way to pay off your mortgage quickly is to make extra payments as long as your mortgage allows you to.” One strategy that can make this a reality is to send any unexpected windfalls straight to your mortgage company.
You can dedicate your potential windfalls like bonus , tax refund, a raise, a garage sale, and credit card rewards towards paying down your mortgage loan. This will not cut into your regular monthly income and may be the key to paying off your mortgage loan early.
Marilyn Lewis in Money Talks News says, “The highest interest rate debt should take priority. But, if a mortgage is your only debt, you should not even ask yourself what you will do with the extra money that falls in your hands and should add it to your mortgage loan, designating it as your additional principle.”
The dollar- a-month plan should be financially feasible if your income increases steadily or even slightly consistently over time.
You should increase your monthly payment by $1. By simply paying $900 in the first month and $901 in the next month and so on you could reduce the term of your 30-year mortgage of say $150,000 (with a fixed 6% fixed interest rate) by eight years.
Many people who have a mortgage loan worry about interest rates going up but do not want to be tied down by a fixed loan. Journalist Matt O’Neil suggests that a split-rate home loan can help you pay down your mortgage faster. It is a good compromise as it a combination loan which means you do not have to choose between a fixed rate and a variable rate loan. This type of loan can help you save because it fixes a part of your loan at a specified rate and the rest of it will be charged a variable rate. This means you will have the security of knowing that if the interest rates rise part of your loan is safely fixed and won’t move. You can still benefit during times when rates are lower as you can use the variable portion of your loan and pay that part off more quickly.
So there you have a handful of known tricks to pay off your mortgage faster. But, even then it will take time as a mortgage balance is a huge amount of money and you cannot pay it off overnight. But you should not let this deter you. You must keep your eye on the goal of paying off your mortgage in half the time. Imagine how it will feel not to have that monthly payment any longer.
However, if you have other needs for your money like credit card debt or any financial issue you should definitely have a higher priority for these than getting rid of your house payment. Once you have dealt with these you could go back and get rid of your mortgage.
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“consumers wishing to file a complaint against a company or a residential mortgage loan originator should complete and send a complaint form to the texas department of savings and mortgage lending, 2601 north lamar, suite 201, austin, texas 78705. complaint forms and instructions may be obtained from the department’s website at www.sml.texas.gov. a toll-free consumer hotline is available at 1-877-276-5550. the department maintains a recovery fund to make payments of certain actual out of pocket damages sustained by borrowers caused by acts of licensed residential mortgage loan originators. a written application for reimbursement from the recovery fund must be filed with and investigated by the department prior to the payment of a claim. for more information about the recovery fund, please consult the department’s website at www.sml.texas.gov.”