Imagine you owe nothing on credit cards, student loans, credit lines, and cars. Better yet, your children’s college savings funds are in good standing and you’re on track to have your mortgage paid off in half the time you expected — 15 years rather than 30. Instead of worrying about making mortgage payments during your retirement years, you realize that you’ll have at least 10 working years of earning income without the largest household expense.
This scenario isn’t just a dream; it’s a reality for those who can shift the way they spend, save, and invest their income. You can adjust your budget in several ways to pay off your mortgage early. It’s a numbers game. Bear with us while we explain some of the easiest ways to make the dollars and cents work for you.
Paying just a few extra dollars a month can shorten your loan dramatically. If your monthly mortgage payment is $1,017, round it up to $1,035. Or even higher, to $1,050. The additional money you pay will add up over time to save you interest and years.
The Baker’s Dozen
Make 13 mortgage payments a year instead of 12, and you’ll save thousands in interest. You can make that extra payment gradually over the course of the year. Divide your monthly mortgage by 12 and add it to each payment every month. Do this every year, and before you know it, the length of your loan has shrunk.
Another way to fit in the 13th payment is to make what’s known as bi-weekly payments. Pay half your mortgage every two weeks — that is, 26 half payments instead of 12 full payments a year — the result is one extra mortgage payment a year.
If you like the extra house payment a year concept, think what the effect would be making a whole extra payment every quarter. More dollars and time saved.
When you get a raise or bonus from work, put some or all toward your mortgage. The same for your tax refund, credit card bonus checks, or unexpected windfall. You can use it to make the extra payments we’ve suggested above, or maybe there’s enough to make a large, one-time payment to cut the total interest on your mortgage.
Beware that doing so will take money from other immediate needs you have. But if it’s money you didn’t have before and won’t miss if you put it toward your home loan, it’s worth considering.
Refinance, or pretend you did
This is the option many homeowners are likely familiar with. You might refinance simply to take advantage of a lower fixed interest rate. But you also can refinance a longer term mortgage into a 15-year loan.
Let’s say you bought your home with a 30-year, fixed-rate mortgage for $200,000 at 4.5 percent. Five years later, you refinance for a 15-year loan at 4 percent. That means you’ll pay off the mortgage 10 years sooner and save more than $60,000 on interest.
Keep in mind that refinancing comes with closing costs, and even with a lower interest rate, the faster payoff means locking into higher monthly payments. If you already have a low-interest rate, save on the closing costs of a refinance and simply pay on your 30-year mortgage like it’s a 15-year mortgage. Refer to the ideas above if you have the income to add onto mortgage payments and pay off that loan early.
Whatever choice you make in making the effort to pay your mortgage sooner than later, it’s best to call your mortgage lender before you change your payment schedule. You’ll want to make sure that any extra money you pay is correctly calculated and applied to your loan.
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