How to Pay off Your Mortgage Early
The best thing about a mortgage? With a payment plan set in place, you can buy your dream home over a period of time, instead of needing to scrape up several hundred-thousand dollars only to spend it in all in one go. True, it would be nice to be able to pay for a house right away and never have to think about it again, but for most people, that’s just not realistic. However, the downside to a mortgage is that it will come with an interest rate, which is the case with any kind of loan.
Unfortunately, most of the money you’ll be investing within the early years of your mortgage is needed to pay off those interest fees, rather than boosting your home equity. Annoying but necessary. Don’t worry, this won’t be the case for the whole duration of your mortgage. As the years roll by, your situation will change. If you’re interested in speeding up the process a bit, here are some tips for how to pay off your mortgage quicker than planned.
Look Into Accelerated Payments
Generally speaking, you’ll be paying off your mortgage on a regular monthly basis, with a total of 12 monthly payments throughout a year. So, if you start your payments by paying $1,000 every month, by the end of the year, you’ll have paid off $12,000 of your total mortgage.
Here is where it will benefit you greatly to look into paying in “accelerated” installments, as you might be able to save yourself several years worth of mortgage payments. Essentially, with accelerated payments, you’ll pay in two-week installments, rather than once every four weeks. One year is made up of 26 groupings of two-week stretches. So, if you’re paying $500 every two weeks (instead of $1,000 every four), by the year’s end, you’ll have made a total of 26 installments of $500, which will add up to $13,000 a year in mortgage payments (rather than $12,000).
This means you’ll be paying an extra $1,000 per year, shortening the length of your mortgage at a relatively low cost to both your finances.
Add To Your Payments Whenever Possible
Depending on how much you’re paying for your home, it can often take the average homeowner 25-30 years to pay the full amount of their mortgage. So, if you’re paying in relatively small installments, adding money to them here and there can help reduce the length of your mortgage. Even increasing your payments by $100 a month, or using any holiday work bonuses and returns from your income taxes will help speed things along.
For example, if you managed to afford another $500 each year, over the course of 25 years, you’ll have amassed $12,500 dollars that you can use to decrease your amortization time (fixed payment period) by several years.
Keep in mind that depending on your lender and what type of mortgage you have, increasing your mortgage payments might not always be an option all the time.
Cut Down On Your Other Expenses
When you’re trying to be a dedicated homeowner, paying off your mortgage should become one of your main goals. So, if you wish to devote as much of your income as you can, and pay it off as early as possible, a good way to do so is by trimming your budget and spending less on unnecessary things. If you ever manage to get some kind of pay raise at your current job, make sure that you invest it wisely instead of buying new stuff with it.
To find out How to Maintain an Effective Budget, click here.
If You’re Unsure, Speak To A Professional
When you’re thinking of applying for a mortgage, or you’re not sure about which payment method is best suited to your needs, it’s best to sit down and have a discussion with your chosen lender. Since there are several different ways you can deal with a mortgage, there might be a solution or limitation that you’re unaware of or haven’t thought of yet. So, if you’re having problems understanding or dealing with your mortgage, you’re much better off talking to a specialist to get the proper information.
Get Out Your Calculator and Review All Factors
In the end, everything depends on you and your financial stability. If you’re nervous about devoting your extra money toward paying off your mortgage quicker, sit down with your calculator and run the numbers. Seeing exactly how much time and money you’ll save in the long run will definitely help you make a decision.
Here’s a quick example of how you can paying down your mortgage sooner than you had originally planned.
Let’s say, for the sake of argument that you have a $350,000 mortgage, spread out over 30 years worth of installments.
- You decide that you want to take on the accelerated payment plan mentioned earlier ($500 installments every two weeks).
- You manage to scrounge up $5,000 more each year through holiday bonuses, income tax returns, etc.
- You receive a pay raise at work, giving you an extra $1,000 yearly.
- Because of this, you decide to add another $100 for each two-week payment.
- Lastly, you add together whatever else you manage to save up over the course of the year by cutting down on expenses. We’ll say $1,000.
So, you’ll be devoting a solid $10,600 each year, all towards your mortgage term. That’s a nice chunk of change to help you pay off your mortgage earlier than you originally planned. True, for a lot of people, saving that much extra money every year is not an easy feat. However, when you’re looking pay off your mortgage as quickly as you can manage the motivation will come along one way or another.
For more information on the Benefits and Pitfalls of a Short Sale, read this.
Priorities and Alternative Investments
True, paying off your mortgage early can indeed be the best solution for living with as little debt possible. However, if you’re able to find a lender that will give you a solid, low-interest fee rate, it can also be a good idea to invest some of your money towards other alternatives. For example, if you’re comfortable with your current mortgage payments, you might consider using your bonus money to finance any repairs or renovations that have to be done around the house. This way the house will be worth more on the real estate market, if and when you ever decide to sell it.