A standard mortgage typically takes between 15 and 30 years to pay off, which can seem like a lifetime. Over the years, you’ll not only pay for your home but also interest, which often adds up to many thousands of dollars.
With that in mind, perhaps you’ve asked yourself, “How to pay off my mortgage early?”. Learning to repay your loan faster rewards you with financial freedom and can save you a considerable chunk of money.
Fortunately, there are several strategies you can use to achieve true homeownership more rapidly. But, of course, it’s essential to understand the risks as well as the benefits, so in this guide, we’ll explore eight tips for those wondering “how to pay off my mortgage fast.”
1. Ditch Monthly Payments
With a standard mortgage, you’ll be required to make monthly payments over the course of 30 years. However, many lenders will allow you to switch to bi-weekly or even weekly payments. So, instead of paying the full price once a month, you’ll split it into smaller chunks.
For example, if you’re paying $1,500 monthly, you’ll pay $750 every two weeks instead, or $375 weekly. Essentially, you’ll be paying the same each month, so you won’t necessarily feel an additional strain on your finances. But, instead of making 12 total payments a year, you’ll actually make 13.
By making one additional payment each year, you can shave as much as seven years off your mortgage period. As a result, you’ll avoid seven years of interest payments, saving you thousands of dollars.
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2. Round-Up With Principal-Only Payments
Each mortgage payment you make is split between paying off interest on your loan and paying the principal, i.e., the amount you owe the lender without interest. The more principal you pay, the more equity you will have in your home.
Fortunately, many lenders will allow you to make extra payments each month that are marked as principal only. As such, these additional payments go towards building equity and paying off your mortgage faster.
The easiest way to do this is to round up your current repayments to the nearest 100 or so and mark the extra as principal only. For example, if you’re paying $1,315 monthly, you could round it up to $1,400. The additional $85 will only go towards paying off the principal, boosting your equity by an extra $1,020 per year.
3. Reduce Your Loan Term
The most obvious way to pay your mortgage off quicker is to reduce the loan term itself. Most lenders offer various choices, typically from as little as five years up to the standard 30-year period. Other common term lengths include 10, 15 and 20 years.
Reducing the loan term will inevitably result in higher repayments, so this isn’t always a viable option. However, you might be surprised to hear that the repayments aren’t always as high as expected.
For example, if you want to switch from a 30-year term to a 15-year one, you might expect the repayments to double. However, shorter-term loans generally benefit from lower interest rates, so the actual fee may be significantly lower than you’d anticipated.
And you don’t have to make a drastic change. Even switching from a 30-year to a 25 or 20-year term can result in significant savings while costing less than you had initially feared.
4. Add Any Windfall Cash to Your Mortgage
If you have a standard 30-year mortgage term, there’s a good chance that your financial situation will change during that time. You may be promoted at work and enjoy a pay rise, or maybe you’ll inherit a chunk of cash, or you never know, you might win big on the lottery. If full homeownership is your primary goal, this extra cash can go into paying off your mortgage early.
For example, imagine your monthly pay increases from $4,750 to $5,000. That extra $250 could be added as a principal-only payment to your monthly mortgage payments. Alternatively, most lenders allow borrowers to make one or two lump-sum payments a year. So, if you inherit or win a few thousand dollars, you can pay a hefty chunk of your mortgage off in one hit.
Tax rebates are another unexpected windfall that can be ideal for paying off your loan quicker.
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5. Maintain Your Payments if Rates Fall
When it’s time to renew or renegotiate your mortgage, there’s a chance that interest rates will have dropped. This can enable you to make smaller repayments, but it’s worth declining the offer if possible.
Since you’ve already budgeted for the previous payment price, it’s worth sticking to it, with the extra added as principal only. This is a fantastic way to quickly build equity without changing your finances at all.
6. Keep Up to Date With Interest Rates & Borrowing Options
It’s easy to forget about your mortgage and let it run on autopilot once you’ve set it up. However, it’s well worth periodically checking out what other offers exist, and whether interest rates have dropped significantly enough to warrant switching your mortgage provider.
Breaking your current agreement will result in penalty charges, so weighing the pros and cons of doing so is essential. However, sometimes switching to a new lender can save thousands of dollars in the long run and reduce the amortization period by many years.
7. Beware of Penalties
Every mortgage is different and tailored to your unique circumstances, so it’s important to review the terms and conditions before making any changes to your mortgage.
For instance, most lenders cap the amount you can pay yearly when making lump sum payments. So, paying too much can result in strict and expensive fees. All in all, paying your mortgage early can lead to penalties with some lenders. If you think about it, they’re losing a lot of money in interest payments if you shave a few years off the mortgage term, and these penalties enable them to recoup some of the losses.
In some cases, the benefits outweigh the fines, so be sure to crunch the numbers. For example, if having full ownership of your home is the goal, you might find that the penalty is a fair price to pay.
8. Talk to Your Lender but Don’t Be Tied Down
You can save thousands of dollars in interest payments by getting actively involved in the mortgage process. Just be sure to discuss your options with your lender before you make any changes. The rules and regulations in your contract are often flexible, and lenders will generally want to keep you as a client.
Just remember, if another lender offers far better terms, you can switch at any time. Alternatively, let your current lender know you’ve had a better offer and see if they can match it. This way, you can generally avoid penalties for breaking your existing contract.