5 Easy Ways to Pay Off Your Mortgage Faster
Do you dream of the day you pay off your home loan? You can realize that dream three, five, ten or even fifteen years faster with a few alternatives. Here’s how.
1. Refinance and Reinvest
The average mortgage rates in 2014 have been about four percent for 30-year fixed loans; 15-year fixed loans and 5/1 ARMs have been around three-percent. Suppose you’ve been paying on a 7.25 percent $200,000 30-year mortgage for four years at approximately $1,364 per month, and can get a refinance rate that’s at 5.5 percent. By refinancing to the lower rate, but continuing to make the same payment, you could shave five years off your mortgage, and save $82,080 in interest. However, if you can get a 15 year fixed at three percent, your payment will increase by $17 to $1,381 per month and you’ll save $242,560 over the life of the loan while shaving nine years from your repayment period.
2. Double Up
One of the most frustrating things about paying a mortgage is how slowly the balance goes down in the early years. Suppose your $200,000 mortgage has an interest rate of 4.00 percent. After paying $955 a month for an entire year, your balance will still be $196,478. That’s because after paying the interest owed, not much goes toward reducing the principal balance. However, what if you paid extra each month – doubling the principal payment? The advantage of this strategy is that your extra payments start out low and then grow over time as (hopefully) your income increases. The result is that you pay off a 30-year mortgage in approximately 17 years.
3. Dedicate Savings
One risk of prepaying a mortgage is that if you need the money, it is already gone to prepayments. Speak with a qualified financial advisor for options; two products are a must to ask about:
- CD (Certificate of Deposit)
- Money Market Savings
When your principle balance and your savings balance match, it could be time to think about an early mortgage payoff.
4. Refinance to a Shorter Term
Perhaps the most direct way to accelerate your mortgage repayment is to refinance into a shorter-term loan. The biggest advantage of this method is that shorter loan terms usually come with lower interest rates. Take the previous example discussed earlier in the article; by refinancing a $200,000 30 year fixed loan at 7.25 percent to a 15 year fixed at three percent, you could save $242,560 over the life of the loan.
5. Bi-weekly Payments
Another easy way to accelerate a mortgage payoff is to divide the monthly payment in two, and make half of it on the first of the month and half before the 15th of each month. This works especially well if you get paid every two weeks. Instead of making 12 monthly payments, you’d make 26 bi-weekly payments; this is like making an extra payment each year. On a 30-year mortgage at 4.0 percent, those interest savings would shorten your mortgage by just over four years. Remember, you may have to make one full payment prior to setting up bi-weekly payments, so ask your lender what is required for this setup.
Before You Pre-pay Your Mortgage
While becoming mortgage-free is a good goal, there may be smarter uses for your money. If you have high-interest credit card debt, for example, you’ll save more by paying it off than you will by making extra mortgage payments. Remember credit card debt typically carries a much higher interest rate and is not usually tax-deductible. You should also have an emergency fund – enough to cover three-to-six months of living expenses. Finally, make sure your retirement account is fully-funded, especially if your employer matches your contributions.
By using any of these tips, or by combining two or more of them, you may move up your mortgage payoff by years. Speak with your tax professional and your financial advisor and compare mortgage rates for refinancing to find the best scenario for you.