7 Painless Ways to Pay Off Your Mortgage Years Earlier
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Want to pay off your home and run the mortgage contract through the shredder a lot sooner than you planned?
There are many ways to pay off your home loan faster. With the right tactics — like the following ones — you’ll scarcely notice the increase in your monthly payments.
1. Make mortgage payments every two weeks
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Most homeowners make 12 monthly mortgage payments per year. But if you make half-sized payments every two weeks, you’ll make 26 half-payments per year — the equivalent of 13 full payments.
Essentially, it is like making 13 monthly payments every year rather than the usual 12.
To go this route, call your lender and ask the best way to do it. Some lenders will set you up with such payments. Or, you might simply prefer to send in the extra payments by mail or electronically.
Whenever you make any extra payment, however, be sure to designate it “apply to principal.” Otherwise, the lender may treat it as a prepayment of your next regular monthly payment.
According to one calculator, if you have a $200,000 mortgage with a fixed interest rate of 4.5 percent, making biweekly payments would save $28,037 in interest over the life of the loan and pay off your mortgage in 25.6 years instead of 30. That’s a big bang for not many extra bucks.
2. Pour every bit of extra cash into your mortgage
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Dedicate every windfall you receive — such as bonuses and gifts — toward your mortgage principal.
It’s possible you’ll find better uses for extra cash than paying down your mortgage, though. For example, if your after-tax mortgage interest rate is 4 percent, but you can earn 5 percent on your money elsewhere, you’re probably better off earning the 5 percent.
3. Round up your payments
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Get in the habit of rounding up your monthly payment. If it’s $1,013, pay $1,020 or even $1,100.
Do this on a regular basis, and you’ll shave years off your mortgage while feeling little pain.
4. Make one extra payment a year
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This is an alternative to making a payment every two weeks. At the end of the year, give yourself a holiday gift by making an extra payment. Heck, do it at any time.
Or, if you’d rather, just add an amount equal to one-twelfth of your mortgage payment to each month’s payment. For instance, with a $1,013 monthly payment, one-twelfth is about $84. So, you’d pay $1,097 monthly instead.
5. Refinance into a shorter loan
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Interest rates are generally lower on shorter-term loans than on longer-term loans. So, borrowers choosing shorter terms — such as a 15-year mortgage instead of a 30-year mortgage — can save a great deal of money in the long run, although their monthly payment will likely increase.
6. Refinance and pretend it’s a shorter loan
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If locking into a shorter mortgage with higher monthly payments feels scary, you can get much the same effect by refinancing into a cheaper 30-year mortgage but paying it off on a shorter schedule.
You won’t enjoy the lower rates offered for shorter-term loans, but you’ll still save heaps of money on interest.
This option requires willpower, because you’re making a larger payment than you are required to each month. But it gives you the option to fall back to your smaller required payment if you need extra cash.
7. Decide if refinancing is cost-effective
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Options 5 and 6 involve refinancing your mortgage. Before considering those options, decide if refinancing is a good move for you.
Whether refinancing is worth it depends on the various associated costs, whether rates are low enough to justify a refinance and how long you’ll stay in the home. To be a good deal, you’ll need to stay long enough to more than recoup those costs.
You can get an idea of your costs using FICO’s mortgage refinance calculator. Also, you can shop around by telling several mortgage lenders how much you want to borrow and asking for their estimates of fees.
Tip: Don’t give lenders consent to pull your credit report until you’re ready to actually apply for a loan, as that can temporarily ding your credit score.
