Signing a 30-year mortgage agreement can be truly daunting. It can feel like signing your life away. But that doesn’t have to be the case.
Paying off your mortgage early isn’t as difficult as you might think. It can be as simple as paying half your monthly mortgage payment every two weeks instead of the full amount every month. Paying even a small amount of extra money toward your loan principal at the beginning of your mortgage can shave years off your loan term and thousands off your total interest paid. Follow these strategies to pay off your mortgage faster, and enjoy the freedom and financial security of knowing you own your home outright.
Pay Your Mortgage Every Two Weeks Instead of Every Month
Making just one extra mortgage payment per year can knock years off the length of your home loan. And you don’t even need to make room in your budget for a whole extra payment per year.
Instead, just split your monthly mortgage payment in half – pay half the amount every two weeks instead of making the whole payment every month. You see, there are 52 weeks in the year, for a total of 26 half payments. That adds up to 13 whole payments a year, rather than the 12 payments you’d end up with if you only paid monthly. And, as far as your budget is concerned, you’ll still be paying the same amount every month. You can even talk to your bank and have them send statements bimonthly instead of monthly.
Pay a Little Extra Toward the Principal Every Month
Can you afford to pay an extra $25 a month toward your mortgage principal? What about $50? Pop those numbers into a mortgage calculator, and you might be surprised at just how many years you can take off your mortgage by paying a small extra amount toward the loan principal every month.
It works because your mortgage consists of both principal, which is the amount you borrowed, and interest, which is the amount your bank charges you for the privilege of borrowing that money. Your mortgage interest is calculated as a percentage of your principal, so the smaller your principal amount is, the less interest you’re going to pay. This strategy is especially effective if you’re able to pay extra towards your principal at the beginning of your loan term. Just make sure you specify on the check that you want extra funds applied to the principal, or else your bank may just put them towards your next monthly payment.
Refinance to Get a Shorter Loan Term
Most new homeowners choose a 30-year loan term because they can get lower monthly payments that way, and if those lower payments leave you more disposable income to put towards the principal of your loan, then it’s hard to see how refinancing for a shorter loan term can help. But refinancing from a 30- to a 15-year loan term can usually get you a lower interest rate, which can save you a lot of money in the long term. And, while you might think that refinancing to a 15-year term would double your monthly payments, that may not be the case. Your monthly payment may be more manageable than you’d expect, and could still leave enough room in your budget to allow you to keep paying extra towards your principal every month.
Put Extra Funds You Receive Towards Your Mortgage
It’s always nice when you get a windfall, whether it’s a tax refund, a birthday gift, a wedding gift, an inheritance, or even something like lottery winnings. If you can put some of that extra money towards your mortgage, you can significantly reduce your loan principal, save yourself interest charges, and pay your loan off early.
And if you end up with a large enough lump sum – say, $5,000 or more – to put towards your loan principal, you could even recast your mortgage. Mortgage recasting doesn’t change your interest rate or your loan term, but it will involve reamortizing your loan, which can lower your monthly mortgage payments, leaving you even more spare cash to put towards lowering your loan principal each month. Your total interest payments will be recalculated, too, and you’ll end up paying far less in interest than you otherwise would.
Paying off your mortgage years early sounds like an unattainable pipe dream to most homeowners, but it’s really not. Putting just a little extra towards your mortgage principal each month can slash years off your loan term and save you thousands in interest – so you’ll have more money to put towards your other financial goals.