Whether you decide to pay the loan down in big chunks or a little at a time, extra payments toward principal can make a significant difference over the life of the loan. This article is here to stimulate some ideas for how you may make that happen.
Some of these options will have you paying off your mortgage a decade or more early. Others will cut just a few months or years off of the debt. If your budget allows, consider using a combination of these approaches to really hit that debt hard.
IDEA NUMBER ONE: If you have a 30-year mortgage, you may wish to pursue refinancing your property over a shorter period (e.g. 15 years). Not only will you pay it off twice as fast but you may also benefit from a lower interest rate. This is obviously a more aggressive way to pay off your debt and requires the higher payment consistently every month no exceptions. This gives you less flexibility in your budget.
Refinancing to a 15-year mortgage could save you hundreds of thousands of dollars in interest over the life of your loan, besides getting rid of mortgage payments much sooner. You'll have to check out current estimated mortgage rates to see just how much this refinancing process could save you. Additionally, will also have to consider the actual costs of refinancing. If you have plenty of room in your budget to cover the increased payments, it might be. But if you're currently working on other competing financial goals, refinancing may not be your best bet.
IDEA NUMBER TWO: Refinance to recognize a lower principal amount (if you have been paying down the loan for some time). This should lower your monthly payment. However, keep paying the same, higher amount you did before the refinance. This way that extra money is going toward the principal balance. This has the same result as making extra payments each month on your current mortgage, but gives you a lower required payment. This allows more budget flexibility.
Just how powerful this option could be depends largely on your current interest rate and your new interest rate. But here's an example (using this calculator), just so you can see how it might work:
IDEA NUMBER THREE: Utilize any bonuses, pay increases or other sums of money to make additional payments against your mortgage. When you do this, it doesn't change your income versus debt every month and just takes that extra to make the payment before you really feel it. If you're already leading a comfortable lifestyle and can avoid lifestyle inflation that often follows a raise, you can put your whole raise amount towards your mortgage balance.
Consider this, if you're currently putting 15% of your income towards your mortgage payment, 15% of each annual raise amount should also go towards your mortgage, in addition to what you're already paying.
IDEA NUMBER FOUR: Pick a manageable number and challenge yourself to paying that much extra each month (e.g. $50). It seems like a small amount but when you do it consistently over time, it can make a difference and save on interest. If your budget is just too tight, consider what you might cut out... e.g. are you making a regular trip to Starbucks that you could find a way to survive without?
For example, if you have that same $200,000 mortgage at 5.5% interest, adding only $50 per month to your mortgage payment allows you to pay it off in just over 27 years, saving about $24,162 in interest. That's a pretty big difference, for less than the cost of a nice dinner on the town each month!
The biggest problem with this approach, though, is that it requires willpower. To reap those benefits, you have to voluntarily put an extra $50 towards your mortgage payment every month.
5. Use cash windfalls to pay lump sumsInstead of paying a little extra each month, you could pay a large lump sum here and there. This can be done with a cash windfall, such as from a yearly tax refund, work bonus, or inheritance.
Just how big of a difference a windfall can make depends on its size. But the good thing about these payments is that you can apply them directly towards the principal of your loan. So if you put $3,000 towards your mortgage's principal in April when you get your tax check, all of your payments from there on out are a little more effective, because less of them is going towards interest.
6. Make biweekly paymentsIf you opt to make biweekly payments on your mortgage, you'll make an extra mortgage payment every year. Making 26 payments a year with our example cuts almost five years off a typical 30-year mortgage.
There are a couple of ways to do this. You can manually log in to make 1/2 your mortgage payment every two weeks. This is great if it aligns with when you get paid! Or you can use a free bill payservice to set up automatic payments for this purpose.
If you'd rather stick to making your payments monthly, just add 1/12 of a monthly payment to each payment, and you'll reap the same benefits of biweekly payments.
7. Set a target payoff dateSetting a target payoff date allows you to know exactly how much extra to pay each month to be mortgage-free by a certain date. You'll have the added motivation of marking your calendar to plan the celebration.
This calculator is a good one for helping you do the math here. Let's say you want to pay off that $200,000 mortgage in 18 years when your child goes to college. You'll need to put an extra $325 towards your payment each month.
What if you want to pay off your mortgage in 10 years? You can not-quite-double your payments to $1,035 to achieve this goal.
8. Combine methodsThere's no need to select only one method from this list. Many mortgage holders can choose a few options on this list and combine them to pay off their loan even earlier. Let's say you apply an extra $200 each month as well as your $3,000 tax refund every April — you'll see double the benefits, and pay off your mortgage even faster. In the personal finance world, every penny saved is a penny earned… so, go save yourself some interest and pay off that mortgage early!
5/5/2018 01:22:29 pm
All great ideas...this is a very informative and well put together article. In regards to the biweekly mortgage plan... I feel that is the best solution if the bank allows it. Most lenders do not offer an actual biweekly payment program and rely on 3rd party processors due to them not accepting partial payments from the consumer. The 3rd party processors can charge high fees but if there is no fees this is by far the best solution to paying off your mortgage early!
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