To pay off your mortgage, purchasing a home is the wrong option. It is more like a massive debt.
Traditionally, a mortgage loan is repaid over 30 years. But nowadays, some terms call for up to 40 years of repayment of mortgage loans.
To so many people, three or four decades probably seem like an infinite time to take to pay off a debt. You may not be interested in changing the terms of their mortgage loan, such as refinancing to a lower interest rate.
There are a few things you could do to make some adjustments fee. Also, the extra money could be put into investments – but you’d have to make at least the same percentage return as your interest just to break even.
Right now, that means playing the stock market or putting money into less-risky savings vehicles. An example is CDs, which are barely paying 1% in some places. Remember that these investments are taxable. Your mortgage interest can be used to reduce your tax burden.
If you aim at paying off your mortgage early, always ask if your lender allows prepayments without penalty. You don’t want to pay toward the principal and get penalized for it.
Also be sure your extra money is being put toward the principal, and not next month’s mortgage payment. That won’t reduce your interest payments. It is advisable to start paying off the principal at any point during the term of the mortgage loan. This will help save you money.
But you should start early on to make the most difference – the first half of the payments go toward interest. After the halfway point, the majority of your monthly payment goes to the principal.
Pain-Free Tips To Pay Off Your Mortgage Early
If, for instance, you have a 30 year fixed rate mortgage on a $200,000 loan and you are paying 5.5% APR, and you are motivated to pay that mortgage off early. The enthusiasm is good, and it is one I applaud.
But I will first encourage them to examine their priorities before focusing on their mortgage debt. Ensure you do these things first:
Pay off all other debt. Why? Because getting rid of other debt will free up their cash flow to allow them to attack that mortgage with gusto.
Save at least a six-month emergency fund. Why? Because emergencies will happen, and money tied up in their house cannot be easily accessed to pay for those emergencies.
Be investing sufficiently for retirement. Why? Because you only have one shot at retirement. You should ask yourself this question, “If my retirement account was already on target, would I sacrifice it just to pay my house off early?”
Of course not, but neglecting your retirement account to pay off your mortgage is doing the same thing. After you have met these guidelines, you can then go ahead to try out these Super-easy ways to pay off your mortgage early.
5 Easy Ways to Pay Off Your Mortgage
1. Make your payment every two weeks
This technique is suited for those who are either paid weekly or bi-weekly. This is because they can add their mortgage payments to their pay schedule instead of the calendar. The strategy is effective because a payment bi-weekly, in one year, will amount to 26 payments.
Or the equivalent of 13 monthly payments– one extra payment per year. If you choose this option, you’ll pay off your 30-year mortgage loan is slightly less than 25 years.
Note: You should have it at the back of your mind that many banks may not accept a bi-weekly payment schedule. This is because they are structured to process payments monthly.
However, a diligent borrower can do this on his own by multiplying whatever he is paying now by 1.083 (or 13/12). This is to pay the equivalent of 13 payments a year.
2. Refinance to a Lower Interest Rate
Despite rock-bottom rates, millions of Americans are yet to refinance to a lower interest rate. Some borrowers refinanced during the second quarter of 2012. This lowered their rate by an average of 1.5 percent.
For a $200,000 home loan, that translates to savings of about $2,900 in interest payments over the next 12 months, according to Freddie Mac. (To calculate how much you could save, use the refinance calculator at Money.CNN.com, which, like Real Simple, is owned by Time Inc.)
Try staying in your home for at least three more years with your mortgage is at least $100,000, and with an interest rate of 4.75 percent or higher.
Ask your current loan servicer or lender for its best refinancing rate. Then compare that with rates at banks that you already have accounts with.
Alternatively, you can decide to work with an independent mortgage broker to find the lowest rate. If you can reduce your current interest rate by .75 to 1 percent, go ahead and refinance.
To help the process go smoothly, gather the following paperwork: proof of income (two recent pay stubs), copies of asset information, your tax returns for the previous two years, and proof of investments and other income.
Additionally, be prepared to offer explanations for any recent income irregularities, credit inquiries, or job gaps. “Lenders question these situations because they could be an indication that you can’t afford your current loan,” says Gumbinger.
3. Pour your extra cash into your mortgage
To pay off your mortgage early, dedicate every windfall you receive — a bonus, raise, or a holiday or graduation gift — toward paying down debt. The highest-interest debt is to be your priority.
But if you have an adequate emergency savings fund and your mortgage is your only debt, don’t even ask yourself what you’ll do with extra money when it falls into your hands.
Add it to your mortgage payment, designating it as an additional principal.
You may find better uses for extra cash than paying down your mortgage. For example, if your mortgage rate is 3.8 percent, but you can earn 5 percent on your money elsewhere, you’re going to be better off earning the 5 percent.
4. Utilize pay raises
If a couple’s current house payment is 25% of their take-home pay and they continue to pay that same 25% as they receive future pay raises, they would be making incrementally more significant payments– a relatively pain-free strategy.
Assuming these two get a 4% annual pay raise, this tactic would allow them to pay off that 30-year mortgage off in slightly over 17 years.
5. Refinance and pretend it’s a shorter loan
If it is scary for you to look into a shorter mortgage with higher monthly payments, you can get the same effect by refinancing. When you do this, you will pay off your mortgage quickly if your rates are low enough to justify a refinance.
You won’t enjoy the lower rates offered for shorter-term loans, but you’ll save a lot of money on interest. You could still go ahead and pretend you’re on a shorter schedule.
This option requires determination because you will have to choose a higher payment than you are required to make each month.
Though not so easy to but it makes you flexible to fall back to your smaller payment needed if you need extra cash. And this way, you will pay off your mortgage early.
If clearing off your mortgage early is your financial decision, then begin with these 5 simple and easy ways to pay off debt more quickly. Wiping off your mortgage early can help you save money and get out of debt faster.
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