Paying Off Your Mortgage Early
The idea of having no mortgage payment is very appealing. After all, it probably represents the largest bill in your budget and eliminating it would seemingly make your life very easy The truth is though that while it is a great goal, it might not be right for everyone.
We’ll give you some tips on paying off that mortgage fast in a bit, but first, consider whether paying it off should be a priority in your life.
Would the money be more useful elsewhere.
The first thing that you want to consider is whether or not the money is better put elsewhere. Interest rates are at historic lows right now and chances are that you are paying 4 percent or less in interest.
If you have other credit obligations with higher interest, such as credit cards, the money would be best spent paying that debt off.
Also, consider what your investment accounts are doing. If you are earning a return greater than what your mortgage is costing you, it might be better taking extra money and putting it there instead of paying off a mortgage. Why try to save yourself 4 percent interest when your money could be earning 8 percent?
Is there a pre-payment penalty?
This is very rare these days, but make sure that your mortgage does not contain a pre-payment penalty. If you are unsure, call your mortgage company and ask. You would hate for all of your savings to go towards paying a fee.
Tips To Pay Your Mortgage Off Early
Okay, you have decided that you want to pay your mortgage off early, so how do you go about it. Here are some tips that will get you there and help you to shave years off of the term of your loan.
- Pick a cheaper house.
People tend to go crazy when home shopping. If they get approved for up to 400,000 dollars, you can be assured that they will buy a home for near that price.
The more that you spend, the more that you have to pay back, so why not spend less than you are approved for. You can then take out a shorter term loan such as one that is 15 years. This will allow you to pay the loan off earlier and get you a cheaper interest rate.
- Round Up
We all like numbers that are nice and even. Why not round up your mortgage payment so that you are paying a little bit extra each month.
If your loan payment is 1550 dollars, you would need 1600 dollars to get it done. Not much of a difference in the short term but the long term savings would be significant. Make sure to tell your bank to apply the additional money to principal or it will end up in a suspense account.
- Put 20 percent down.
It used to be that this was the only way to get a home but times have changed. Now you can get into a home with absolutely nothing down. This is good but it comes with a catch, mortgage insurance.
Put 20 percent down and you can avoid mortgage insurance. Mortgage insurance is money that would be wasted and that you could instead put towards paying down the loan principal.
- Use Windfalls To Pay Down Principal
If you get a large amount of money that you were not expecting, use all or part of it to pay down your mortgage. This is money that you were not expecting, so why not use it to reach your goal of being mortgage free. This could be a tax return, a stimulus check or a 2000 dollar bonus from work. If you do not need 2000 dollars right now, put it into your home.
- Refinance Your Loan
If your interest rate is out of line with the currently low rates, refinancing it could shave years off of your mortgage. Money saved from interest could go straight to principal. You might even be able to move to a shorter loan term with the same or even less of a payment.
- Make Bi Weekly Payments
You probably get paid once every two weeks, so why pay just a monthly house payment.
Divide your payment in half and make one every two weeks. If your mortgage is 1500 dollars, you would need 750 dollars to be paid every check. Then you will be making 13 payments a year instead of 12 and you probably will not even notice it.
Do note that unless your mortgage is set up for bi-weekly payments, your mortgage company will likely keep your payments in a suspense account until the full monthly payment balance is reached. It will all work out in the end though.