Paying off a 30-year mortgage on your home can seem like a monumental effort, and one that will take up much of your adult life. Hundreds of thousands of dollars are typically at stake, and it might seem as if you’ll never get there. But what if you could pay it off quicker?
Your home would truly be yours, you’ll save on interest payments, and you’ll have more cash in the bank for when you’re ready to move on. There are ways to pay off your mortgage quicker than the typical 30-year period, but it’s important to understand the risks and benefits. Below, we’ve taken a look at 4 strategies that can help you on your way to true homeownership.
Switch from Monthly Payments
A standard mortgage typically involves a 30-year amortization period, in which monthly payments are made. However, in many instances you can switch from monthly payments, to biweekly, or even weekly payments. Instead of paying the full price once per month, you split it into smaller, more regular chunks.
This generally won’t put an extra strain on your finances. For example, a monthly payment of $1,500 could be split into biweekly payments of $750, or weekly payments of $375. While you essentially pay the same per month, you’ll find that you’re actually making 13 full payments per year, rather than 12. With 52 weeks in the year, you’ll make 26 biweekly payments, which equates to 13 full payments.
This additional annual payment can result in you paying off your mortgage far faster. Indeed, the full loan can be paid off as much as 7 years sooner in this way, which will also save you thousands of dollars in interest.
Make Additional Principal-Only Payments
A mortgage payment is typically split between paying the interest you have on your loan, and paying the principal, the actual amount owed to the lender without interest. However, many lenders will allow you to add extra payments each month that can be marked as principal only. These principal-only payments only count towards paying off the principal, rather than both the principal and the interest.
It’s easier to do than you’d imagine as well. The best way to do it is to round up your repayments to the nearest $100 or so, and mark the extra as principal only. For example, if your repayments are $1,215 per month, you could round it up to $1,300. The extra $85 is marked as principal only, and builds up to paying off an extra $1020 per month.
This is a quick and easy way to reduce your principal, shorten your mortgage term, and pay less interest as a result. Even if the extra monthly amount seems small, it’ll soon add up.
Switch to a Shorter-Term Loan
Of course, if you want to pay your mortgage off quicker, you can always refinance it to a shorter term. Many lenders offer anything from 8-year terms, to 15, or 20, as well as the standard 30-years. A shorter-term typically results in larger monthly repayments, so this isn’t always a viable option. However, the increases aren’t perhaps as much as you’d expect.
A shorter-term loan is normally associated with lower interest rates. So, if you switch from a 30-year term to a 15-year one, rather than paying twice as much per month, you might find the actual fee is significantly lower. Even reducing your term to 25 or 20-years can make a big difference, and not cost you as much as you had feared.
Put Any Extra Cash into Your Mortgage
Over the course of a 30-year mortgage term, it’s likely that your finances will change. A promotion at work can lead to a pay rise, or you might find you’ve inherited a healthy sum of cash. If paying your mortgage off as fast as possible is really important to you, these windfall amounts can all go into your mortgage.
For example, if your pay increases from $4,500 per month to $4,750, the additional $250 could be added to your monthly payments as principal-only payments. Most lenders also allow you to make one or two lump-sum payments per year. So, if you inherit a few thousand dollars, you can use it as a lump-sum payment to knock off a hefty chunk of your principal. Tax rebates are another boon that can go towards paying off your mortgage quicker.
Before trying any of these strategies, however, be sure to speak with your lender. There are typically rules and limitations put in place, and while many are flexible, you don’t want to find yourself paying a penalty because you’ve paid too much extra in one year. Do your research, find out what works for you, and remember that you’re not tied to one lender!
This article is intended for informational purposes only and should not be deemed as legal, financial or investment advice or solicitation of any kind. Before purchasing real estate or insurance, always consult with a licensed attorney, financial advisor, insurance agent, and real estate broker.