If you have ever had a mortgage on piece of property, you may remember that feeling when you looked at the summary and saw how much your loan would cost you over the full life of the mortgage. WHAT! I remember it, heart speed up, I checked the numbers twice, I shook my head and then sighed. The reality is it costs a good amount of money to borrow money. So, you may be interested to learn how to pay that mortgage off quicker and save money.
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:
Original loan amount: $200,000
Original loan terms: 30 years, 5.5% interest
Origination date: January 2015
Original monthly payment: $1,136/month
Current balance: $193,476
New loan terms: 30 years, 3.82%
New payment due: $904/month
Because the refinance payment is $904, if you keep paying #1,136, that is an extra $232 going toward your principal amount every month. Over a longer period of time, that can make a huge impact.
IDEA NUMBER THREE: Utilize pay increases 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! This option takes some willpower.
IDEA NUMBER FIVE: Use cash windfalls to pay lump sums (e.g. one time bonuses, tax refund or cash gifts). Instead of paying a little extra each month, you could pay a large lump sum here and there.
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. If you put $3,000 towards your mortgage 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.
IDEA NUMBER SIX: Make biweekly payments If you opt to make biweekly payments on your mortgage, you'll make an extra mortgage payment every year. Making 26 payments a year could cut 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 set up automatic payments for this purpose.
IDEA NUMBER SEVEN: Set a target payoff date and calculate how much you need to pay each month to make that happen. For example, you may wish to tie the payoff date to a child's graduation.
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.
Each of these can be powerful by themselves as a strategy but you may even wish to combine some of them to have the biggest impact possible. Good luck on achieving financial freedom!