Pour Every Bit Of Extra Cash Into Your Mortgage
Dedicate every windfall a bonus, raise, or holiday or graduation gift you receive toward paying down debt, recommends Marilyn Lewis in Money Talks News.
Obviously, the highest-interest debt takes priority. But if you have an adequate emergency savings fund and your mortgage is your only debt, dont even ask yourself what youll do with extra money when it falls into your hands: Add it to your mortgage payment, designating it as additional principal.
The Basic Formula For Paying A Mortgage In 5 Years
The formula for how to pay off a mortgage in five years is straightforward: create a payment schedule so that you know how much to pay each month, and then make sure you find ways to stick to your payment schedule.
In order to make that happen, you will need to make larger or more frequent payments than your lender requires. You will also need to cut back on other spending or find ways to earn more income each month.
Strategies To Cut Years Off Of Your Mortgage Loan
If you have ever thought to yourself, Am I really going to be paying on my mortgage for 30 years?! you are not alone. Many individuals who obtain a 30-year mortgage loan often think the same exact thing. For some home owners this is something that they want to pay off sooner than later as it often saves them a lot of money in the long run. The obvious way to pay off a mortgage loan faster is to get a shorter-term loan, like a 15-year instead of a 30-year loan. However, on a $300,000 home loan with 10% down, you will likely pay about $620 more a month for a 15-year loan than a 30-year loan and for some, that may be too expensive. If you are in a 30-year loan and looking to pay it off early and save thousands of dollars here are four simple approaches that you can take.
Increase Your Monthly Payments
Refinance, Then Invest Savings
Make Extra One-Time Payments
Make Bi-Monthly Payments
If you can manage to pay a little extra towards your mortgage loan in any one of these ways it is always beneficial in terms of money you will save. If you have questions about obtaining a mortgage loan or doing a refinance please dont hesitate to contact us. We would be happy to help you!
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How Extra Mortgage Payments Work
Real estate attorney Rajeh Saadeh explains the concept behind accelerated payments:
Say you have a 30year mortgage. You can make additional payments applied to your principal at the time your mortgage payment is normally due, or earlier.
Or you can do so at more frequent intervals during the year, he says.
Any time you pay extra on your mortgage, you need to indicate to your lender that the money should go toward loan principal not interest.
That will reduce your loans term and enable you to pay off your loan more quickly, Saadeh explains.
But you dont want any extra payments to go toward your loans interest that wont reduce your principal owed or shorten the life of your loan.
Make sure your lender or servicer is applying any extra money toward principal as its first priority. Otherwise, youll need to indicate that your extra payments should be applied that way.
Commit To Make An Extra Loan Payment Each Quarter
If your budget is too tight to round up each mortgage payment or to pretend that you refinanced and pay a considerably higher amount each time, commit to making an extra payment each quarter.
That means that you should save a little each week so that at the end of every three months , you can make an extra payment. So, in each quarter, you have approximately 12 weeks to find enough money either in your existing budget or through a side hustle to make an additional house payment.
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Recap Of Ways To Pay Off Your Mortgage Faster
If you decide you want to pay off your mortgage early, ask your mortgage lender about:
Whatever you choose, make sure youve weighed all your options to find the best use for your hardearned cash.
Extend Your Repayment Term
A simple way to lower your mortgage payment is to extend your term . You dont need to refinance your mortgage to do this because most lenders will simply offer this service for a fee of about $250.
If you extend your 15-year mortgage to a 30-year mortgage, your monthly mortgage payment will decrease since you have more time to pay back your loan by stretching out the term. While youll end up paying more interest on your mortgage over time with this option, its best for borrowers who need an immediate solution to cash flow issues.
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Mistake #: Extending Your Loan Term When Refinancing
Refinancing can save you money in multiple ways, as it allows you to convert to either a shorter or longer loan term, depending on whats best for you. So if youre 10 years into a 30-year mortgage term, you could potentially refinance to a 10-year term and shave off 10 years. On the flip side, you could go for another 30-year term to lower your monthly payments.
However, loans with shorter terms tend to have lower interest rates, allowing you to both save on interest and reach full ownership much sooner. In some cases, though, refinancing could cost you more in the long run, especially if youre planning to extend your loan term. Before you refinance, its a good idea to crunch some numbers and figure out whether having a longer mortgage term really makes sense.
Dont forget closing costs either. If your lender agrees to let you roll those costs into your loan, you could end up paying more money. After all, youll now be on the hook for interest on a larger loan amount.
Mistake #: Not Putting Extra Payments Towards The Loan Principal
Throwing in an extra $500 or $1,000 every month wont necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money youre paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
If youre writing separate checks for extra principal payments, you can make a note of that on the memo line. If you pay your mortgage bill online, you might want to find out whether the lender will let you include a note specifying how additional payments should be used.
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Use My Free Mortgage Payoff Calculator
Head over to my free mortgage payoff calculator and enter your current loan information. The mortgage calculator will show you how many years you have left to pay off your mortgage, and how it changes if you adjust your payment.
In addition to analyzing extra payments, my early payoff calculator will also allow you to adjust the different payment schedules between a 15-year and 30-year loan.
Understanding Your Amortization Schedule
An amortization schedule shows your payment schedule for your current loan. It will show how much money is going towards the principal and how much is going towards interest at each given payment.
You may be surprised to see how much of your hard-earned money goes towards interest at the beginning of your loan. My early mortgage payoff calculator will also break down your amortization schedule to make these payments painfully obvious.
Use An Offset Mortgage
An offset mortgage has a savings account linked to your mortgage, the money held in your savings account is used to reduce your mortgage balance and thereby the total mortgage interest charged. Usually you can choose whether to have this saving reflected in lower mortgage payments or a shorter term. If you wanted, you could also overpay and save even more money.
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Faqs: How To Pay Off A Mortgage Quickly
Should I put my cash into a savings account instead?
Put very simply, if a savings account has a higher interest rate than your mortgage, it might be better to save your money rather than pay off your mortgage loan.
Can you pay off a mortgage early even if you have an early repayment charge ?
Most mortgages with an introductory period, including fixed, tracker and discount mortgages, have an early repayment charge . This is usually a percentage of the remaining mortgage loan.
For example, say you’ve got a £200,000 mortgage that’s fixed for 2 years. If it has an ERC of 2%, you would have to pay the bank £4,000 if you pay off your mortgage early.
Longer fixed rate periods, such as a 5-year fixed mortgage, often have a larger ERC. The early repayment charge also applies if you remortgage to a different lender.
As most mortgages do not have an ERC after the introductory period ends, it can be worth allowing your lender to move you onto its Standard Variable Rate , so that you can pay off the remaining debt, penalty-free.
To find out if you have an ERC on your mortgage, check your mortgage documents or phone up the lender and ask.
Should I overpay my mortgage if I have other debts?
You can choose to prioritise paying off your mortgage early, however mortgage debt is likely to be the cheapest debt you have. This makes it a no-brainer to concentrate your efforts in paying off other, more expensive borrowings first, like credit card or loan debt.
Benefits Of Paying Mortgage Off Early
Many people struggle when deciding whether to pay off their mortgage or build up savings, but in the long run, the benefits of getting free from that mortgage really shine through. For one, having one debt paid off means being able to handle any short-term debts such as credit cards. You also end up saving money if you pay off your mortgage earlier, avoiding additional interest that would have otherwise accrued. Your financial stability is bolstered by cutting out these future payments and also by your ability to better endure turbulent housing market conditions.1
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Make A 20% Down Payment
If you donât have a mortgage yet, try making a 20% down payment. Private lenders will require you to pay private mortgage insurance if you have a smaller down payment. That extra insurance cost will only make it harder to pay off your mortgage quickly.
If you canât afford a 20% down payment, you may want to double check that you can reasonably afford the home. Having a smaller mortgage is the easiest way to pay it off quickly.
Live Off Less Than You Make
The biggest personal finance challenges that we face tend to be attitudes characterized by two acronyms: YOLO and FOMO . YOLO, or You Only Live Once, allows us to permit ourselves to be a little reckless with our finances. Do you want to buy that Porsche? Well, go for it! You only live once!
FOMO, the Fear of Missing Out is similar. All your friends are going on a cruise for your besties 50th birthday? Well, you HAVE to go you dont want to miss out!
Unfortunately, although these feelings are human nature, they certainly do not help our financial situation. We may think that we work hard, and we deserve to spend all the money that we have left after the bills are paid.
However, if your goal is to pay off your mortgage in five years, you may need to make some choices that allow you to live off less than you earn. WAY less than you make for a short amount of time. The best-case scenario is to live on 50% of what you bring home. Then you could use the other 50% for the extra principal.
You could either be super broke for a short amount of time to pay off your mortgage, or you could just be plain broke for the rest of your life. It certainly wont be painless, but you can live off much less than you think.
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This Is The Key To Paying Off Your Mortgage Early
If you are a first time home buyer and wondering what type of mortgage you should choose, ideally, you want a 15 year fixed rate mortgage over a 30 year one. The payments are higher, so you need to make sure you can handle the monthly costs. Your target should be about 25% of your monthly earnings. You can offset the monthly mortgage payment by putting more money down, but that all depends on what you have saved. The reason for applying for a 15-year mortgage rather than a 30-year mortgage is that you are out of debt in half the time and you pay less money in interest.
A 15-year mortgage is not always the best idea because you have to be practical in assessing what you can afford. If you bite off more than you can chew, you will wind up suffering from repercussions that far outway the money saved on interest payments. However, be cautious about choosing a 30-year mortgage too hastily. Lots of people opt for the 30-year plan with the idea that they will pay it off in 15. However, its very uncommon that they actually accomplish this. With that said, If you find yourself in a 30-year mortgage and you want to pay it down in half the time, there are some measures you can take to reach that end goal of paying off your mortgage and lowering the amount of interest you pay. Heres a quick guide on how to pay off a 30-year mortgage in 15 years.
Why You Should Pay Off Your Mortgage Last
Although we wanted to focus on paying our mortgage off early, we also realized we should start paying down our mortgage after everything else was paid off. Luckily, we started our debt-free journey years ago and were able to move on to our mortgage goal.
If you are like most Americans, you may have student loan debt, and car debt. You should pay these off before you begin throwing extra money at your mortgage.
Suppose you do the opposite start paying more on your mortgage, every extra cent you can find. Then you have some type of emergency that causes you to be out of work for eight weeks. Your income is radically cut in the short term, and even though you will be back to work in two months, how will you pay your bills in the meantime?
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Should You Pay Off Your Mortgage Early
It’s fair to say most homeowners love the idea of getting out from under their mortgage debt. Before you take the leap, though, ask yourself if it makes sense. If dedicating yourself to paying your mortgage off diverts money from other equally important financial issues, you may want to pump the brakes. You can also revisit paying the mortgage off once you’ve taken care of these other issues. Before you make a final decision, ask yourself these questions:
- Do I need to pay off credit card debt?
- Is my high enough to access the best, lowest mortgage rates?
- Do I have a savings account that holds a large enough emergency fund to cover three to six months’ worth of bills?
- Am I contributing enough to retirement savings? Will I be able to retire at a reasonable age?
- Do I itemize my tax return each year? Will I miss the mortgage interest deduction if I pay the mortgage off early, or will the monthly savings more than make up for the lost deduction?
- Is my mortgage my most pressing financial obligation? Or do I have others that weigh me down and need to be addressed first?
For many, early mortgage payoff is the worthiest of goals. Sure, you still have to pay taxes, insurance, and upkeep, but the property is all yours. If paying off your mortgage early is on your bucket list, there are plenty of ways to accomplish it. The trick is to find the repayment plan that works best for your situation and fits your monthly budget.
Should You Refinance Or Pay Extra
Paying extra each month is not always the best strategy.
For many, it doesnt make sense to pay down a mortgage loan more quickly, as your interest rate is likely very low, suggests Saadeh.
Instead, you can use that extra cash to invest in an asset like stocks, bonds, or retirement funds, and likely earn a higher rate of return than the interest rate youre paying.
Or, Saadeh continues, you could refinance your loan and save big if you can significantly lower your interest rate.
If paying off the mortgage faster is your main goal, you might consider refinancing to a 15year loan. Depending on how long youve held the mortgage, you may be able to pay it off in almost half the time.
Or, maybe the payments on a 15year loan are too high. In that case, you could take a combined approach:
This is a clever way to get around the higher 15year payments, while still shortening your loan term and saving a lot on interest.
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