Paying off your mortgage and eliminating a big monthly expense can be enticing. While paying off such a large debt may sound appealing, whether or not to do it – and how to do it – will differ for each homeowner depending on their financial situation.
Paying off a large debt makes it easier to handle smaller, short-term debts like monthly credit card payments. Additionally, you save money when you pay off your mortgage earlier because you prevent additional interest from accruing.
Let’s look at five ways to pay off your mortgage early.
1. Schedule Additional Payment Amounts
While you may not be able to double your payments every month, even a few additional payments each year can go a long way. One thing to remember is that you should specify how those extra payments should be applied. If you don’t, your lender will likely use them to prepay your mortgage interest.
2. Budget Wisely
If you aim to pay off your mortgage early, be careful not to throw your monthly budget out of whack by doing so. Keep an eye on your financial well-being and ensure that you consider other financial goals when expediting your mortgage repayment plan.
Paying down higher-interest debt and investing for retirement should still be top priorities. If you have to hold off upping those mortgage payments until you pay off credit card debt, for example, you’ll end up saving money in the long run.
3. Refinance Your Mortgage
To keep monthly payments low, mortgage borrowers often choose a lengthier payment term. A term for home loans is thirty years, but that can vary based on your financial circumstances and the deal you make with your lender.
As you get further along in your career, you might start making more money, allowing you to afford higher monthly mortgage payments. If that’s the case, you can refinance your loan to reduce its term, increasing your monthly payments but decreasing the overall money you spend over the term of the loan. Refinancing for a shorter loan term can save you a lot of money on interest and enable you to pay off your mortgage earlier, especially if you qualify for a lower interest rate.
4. Pay Your Mortgage Twice a Month
In most cases, mortgages require monthly payments or 12 payments per year. By switching to bimonthly payments, you end up making an extra monthly payment each year. For example, if your monthly payment would be $1,500, you are paying a total of $18,000 per year. Switching to biweekly payments would mean paying $750 twice each month. Since some months are longer than others, you will end up paying for an extra month each year. In other words, your annual total would be $19,500. This allows you to pay down our principal faster.
5. Consider a Mortgage Recasting
While refinancing is probably familiar to you, mortgage recasting may not be. When you recast, your principal balance is reduced by one sizable lump-sum payment. Lenders handle recasting differently, so be sure to read the fine print before proceeding. For example, many lenders require a minimum lump-sum payment of $10,000 and often charge a servicing fee.
Once you make the lump-sum payment, the lender reamortizes the loan balance and adjusts the repayment schedule to reflect your new monthly dues which are lower than the original amount.
There are a few benefits to recasting a loan. One benefit is a reduction in your monthly payment. Over the life of the loan, you will also save money on interest and be able to pay off your mortgage earlier. Be sure to check with your lender as not all loan types can be converted.
Paying off your mortgage loan early is a great idea and can improve your financial situation. So, start the process today and reap the benefits in the future.