Save money and pay off your mortgage early. We’ve got the scoop.
Did you know it’s possible to save hundreds, if not thousands of dollars over the course of your home loan by practicing a little thing called early payoff? For many Americans, their mortgage is their largest form of debt. And with debt comes the pressure of wanting to pay it back as soon as possible. However, most homeowners don’t believe they could afford to pay more on their mortgage than what they’re paying right now. We want to challenge you to think outside that box and reimagine the possibilities of debt-free homeownership. If you’re a homeowner who’s still paying off your mortgage, wishing you could pay it off sooner, you’ve come to the right place. Read on to see how you may be able to get out of mortgage debt sooner.
FIRST THINGS FIRST
Let’s look at a scenario from our amortization calculator: a 30-year, fixed-rate, $200,000 mortgage with a 3.25% APR. This borrower’s first month’s mortgage payment would be $870.41 which, not factoring in taxes and insurance, breaks down to $555.55 in principal and a whopping $314.86 in interest! Quite a big chunk of their mortgage payment is just interest. Because of this, over the course of their 30-year loan term, they will have paid a total of $313,348 on that $200,000 mortgage.
Now before you get too excited to pay off your mortgage early, talk to your mortgage lender and ask if they have a prepayment penalty. Some lenders do this and we wouldn’t want you to have to pay a fee for prepaying on your mortgage. That said, before you read on, we highly recommend you consult your tax, financial, and/or legal advisor too before you use any of our methods to pay off your mortgage early!
Reimagine the possibilities of debt-free homeownership.
MAKE ONE EXTRA PAYMENT A YEAR
Take baby steps. Try making one extra payment a year on your mortgage and you could greatly reduce the total amount you pay over time. How might you make this happen? Consider some luxuries you might be splurging on that you could live without. By making financial sacrifices, you could save up enough money throughout the year to make one extra payment.
If there’s no room in your budget or lifestyle for such sacrifices, you could make one extra payment a year by taking extra cash such as your tax refund or a bonus check and applying it directly to your mortgage balance. This puts more money toward your principal amount, which will reduce your interest over the life of your loan. Need help calculating? Ask your mortgage lender or try using an early payoff calculator.
INCREASE YOUR MONTHLY PAYMENT WHEN YOU GET A RAISE
Rather than paying the same amount every month for the next 30 years, increase your mortgage payment proportionately to your pay raises. Like making one extra payment a year, increasing your monthly payment when you get a raise pays down your principal amount, reducing your interest.
Some homeowners even take on a second job to bring in more income because they’re so dedicated to becoming free of mortgage debt. This option isn’t for everyone, but homeowners who work a second job could potentially put all of the money they make from that job toward the principal on their mortgage.
ROUND UP EACH PAYMENT
Another way you may be able to pay off your mortgage early is by rounding up each payment. For example, if your monthly mortgage payment is $1,105, round up and pay $1,200. The additional $95 will go toward your principal and will result in fewer payments and a reduced term. If your budget has room for it, this early payoff tip is an easy way to pay just a little extra on your mortgage every month—and it might be the method that’s easiest to integrate into your lifestyle with very little sacrifice!
MAKE BIWEEKLY PAYMENTS
Yet another way you may be able to pay off your mortgage early is by making biweekly payments. The concept is fairly simple: when you pay half of your mortgage payment every two weeks, you’re actually making 26 half-payments, which comes out to 13 full monthly payments every year. Depending on your interest rate, that extra payment could shave up to eight years off a 30-year mortgage! Just make sure you check with your loan servicer first because some don’t allow biweekly payments.
REFINANCE FOR A SHORTER TERM AND/OR LOWER RATE
Lastly, you could check with your lender and see if you’re eligible to refinance your mortgage for a shorter term and/or lower rate. Oftentimes, a shorter term will raise your monthly payment, but depending on what you qualify for, you could reduce your mortgage term by up to 20 years!
If you refinance for a lower rate, the good news is that mortgage rates are still historically low, so you could take advantage of this time and get a lower monthly payment.
Thinking about paying off your mortgage sooner? These methods can help, but it’s important to plan carefully and seek professional tax, financial, and/or legal advice first. Ask your financial advisor about these tips before you make the decision to pay off your mortgage early.