Getting Rid Of The Fha Mortgage Insurance Premium
If you got your FHA loan after June 1, 2013, you likely pay a monthly mortgage insurance premium . If you put more than 10% down, youll have to pay MIP for the first 11 years, but if you put less than 10% down, MIP is required for the life of your loan.
If youre stuck with MIP, refinancing into a conventional loan may be your best bet but it all comes down to how much equity you have. If you have less than 20% equity in your home, taking on a conventional loan may just mean swapping MIP for private mortgage insurance . But if you have 20% equity, you wont be required to pay PMI on a conventional loan.
To determine how much equity you have, youll need to know how much your home is worth. When you refinance, your mortgage lender will require an appraisal of the home to determine the value. Your equity will be based on what your home is worth when you refinance not what it was worth when you bought it. To find out how much equity you have, simply subtract your current loan balance from your current home value.
Make Paying Off Your Mortgage Early A Priority
How much extra money could you find if you took a hard look at your budget? What if you made a few strategic cuts? Chances are, you can do without a few unnecessary costs or find ways to reduce monthly bills. When you shift your priorities, you might be surprised by how much money youre spending on things you don’t need.
If there’s nowhere to cut, or you just don’t want to reduce your costs, consider how you can increase your monthly income. This could be achieved by working a few extra hours, asking your boss for a raise or bringing in some cash through a second job.
Build Up A Rainy Day Fund
Save for an emergency. We recommend setting aside three to six months’ worth of living expenses in savings in case you lose your job or incur unexpected costs. Without those financial reserves in place, you could put your mortgage in jeopardy, which includes the extra money you worked so hard to put toward it if youre making extra mortgage payments
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Four Alternatives To Paying Extra Mortgage Principal
Before you begin making extra principal payments on your mortgage, its best to consider your overall financial goals. Consider how long you plan on living in the home. Assess any money that you can foresee needing in the future . And determine any current debts you are still paying on.
Assessing your current financial position and your future goals will help identify the ideal use for additional funds or maybe even prove that paying more on your mortgage is advantageous.
So, conversely, what are the alternatives , and what could the benefits be?
Cons Of Paying Off Your Mortgage Early
- Lose your mortgage tax deduction: Homeowners can deduct what they pay in mortgage interest from their taxable income. Paying off your mortgage means losing this benefit and could mean a larger tax bill in the future.
- Could earn more by investing: This is especially true if you have a low-interest mortgage. The amount you spend paying it off could have been allocated towards investments, which may yield a greater return in the long run.
- Lose liquidity and hinder cash flow: When you throw all your money into paying off a mortgage, there may not be much leftover in case of an emergency purchase.
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Fastest Ways To Pay Off Your Mortgage
Making monthly mortgage payments can sometimes feel like something youll be doing for the rest of your life but it doesnt have to be.
Paying off a 30-year fixed-rate mortgage early can save you a bundle in interest charges. For example, if you have a $220,000 mortgage with an interest rate of 4%, you can cut four years off your loan term and save over $23,000 in interest if you pay one extra payment of $1,051.31 per year.
Here are 10 strategic planning and creative cost-saving measures that might require a sacrifice or two, but will help you pay off your mortgage early.
Federal Loan Modification Programs
If youre undergoing a financial hardship and need to reduce your mortgage payment as a result, there are a few federal loan modification programs to choose from. They may be available through your lender, but you must meet certain eligibility requirements in order to reduce your mortgage payments short term or long term.
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Making Biweekly Mortgage Payments
There are some lenders that allow you to automate biweekly payments. This feature makes it easy for you to pay down your mortgage loan faster and for less, without having to even think about the process.
If your lender does not offer such an option, though, youll need to take matters into your own hands. This can be done a handful of different ways heres a look at your three alternatives.
Option 1. You can split your monthly payment in half, logging into your account every two weeks to make a payment. Your savings will be the same as if your lender allows you to schedule biweekly payments.
This option requires you to stay on top of these manual payments, however if you forget to make the second payment one month, you may be charged a late fee by your lender.
Option 2. Automate your regular monthly mortgage payment, taking the legwork out of your lenders requirement. Then, each month you can make an additional principal payment equal to one-twelfth of your monthly amount due at the end of the year, you will have made one extra mortgage payment and significantly reduced your principal balance due.
Option 3. Simply make an additional mortgage payment each year, in the month that works best for you. This one lump payment will go toward reducing your principal balance, though it wont save you as much in interest as if youd made regular contributions throughout the year.
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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Benefits Of An Early Mortgage Payoff
There are two main benefits of paying a mortgage early less interest paid and more home equity faster.
But paying off the mortgage is not necessarily always the best choice if you have more expensive debt, like outstanding credit card balances. Or if you havent yet saved for retirement. You may also want that money to purchase additional real estate, as opposed to it being locked up in your home.
This calculator can at least do the math portion to illustrate the power of paying extra and paying off your mortgage ahead of schedule. Youll then need to weigh those savings against other options like paying your credit cards or ensuring youve saved for retirement.
In other words, make sure youre actually saving money by allocating a larger amount of money toward paying off the mortgage as opposed to putting it elsewhere.
If you want to see the payment schedule, which details every monthly payment based on your inputs, simply tick the box. This will also show you your loan balance each month along with the home equity you are accruing at an ideally faster rate thanks to those additional payments.
To determine your home equity, simply take your current property value and subtract the outstanding loan balance. For example, if your home is worth $500,000 and your loan balance is $300,000, youve got a rather attractive $200,000 in home equity!
And thats all it takes to use this mortgage calculator with extra payments. Happy mortgage saving!
Is Early Repayment Right For You
You should base your financial decisions on your individual circumstances, but we can help frame some scenarios that can help you quickly decide if early repayment works for you. Weve created two qualifications lists to review that may help you figure out if paying extra on your mortgage is a good idea.
Here are some reasons to forgo extra payments on your mortgage:
- You have other high-interest debts
- You dont have an emergency fund
- You arent on track for retirement
- Youll benefit from using your mortgage interest as a tax deduction
Conversely, here are the scenarios where paying off your mortgage early could be beneficial:
- Your high-interest debts are paid, you have an adequate emergency fund, and youre paying into retirement
- You have a healthy balance between liquid and non-liquid assets
- You already have a healthy stock portfolio
- You have the opportunity to refinance to a lower interest rate
- Your monthly income increased
Neither of these lists covers the full scope of every possible scenario, but if your situation identifies overwhelmingly with either of these lists, then you probably have your answer on whether you should pursue paying off your mortgage early.
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Commit To Making One Extra Payment A Year
The average American gets about $2,833 in their tax refund, according to the IRS. For most people, this is more than enough money to cover an extra mortgage payment every year.
You can put your tax return to good use and make an extra mortgage payment. On a $150,000, 30-year loan with a 4% interest rate, a single extra payment every year will help you pay off your mortgage 4 years early.
Mistake #: Not Asking If Theres A Prepayment Penalty
Mortgage lenders are in business to make money and one of the ways they do that is by charging you interest on your loan. When you prepay your mortgage, youre essentially costing the lender money. Thats why some lenders try to make up for lost profits by charging a prepayment penalty.
Prepayment penalties can be equal to a percentage of a mortgage loan amount or the equivalent of a certain number of monthly interest payments. If youre paying off your home loan well in advance, those fees can add up quickly. For example, a 3% prepayment penalty on a $250,000 mortgage would cost you $7,500.
In the process of trying to save money by paying off your mortgage early, you could actually lose money if you have to pay a hefty penalty.
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Early Mortgage Payoff Calculator
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What If I Make Two Extra Mortgage Payments A Year
If making an additional payment on top of what youd already be paying extra through a biweekly schedule or committing to one annual extra payment is a feasible financial option for you, doing so can be a great way to gain full ownership of your home even faster.
However, you should only consider this option if it wont put your ability to pay for your other financial responsibilities at risk.
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Youll Pay Your Mortgage Off Faster
So, just how much sooner would you pay off a mortgage with biweekly payments, versus standard monthly payments? Lets look at the math.
There are 52 weeks in a year, which means that with biweekly payments, youll make a total of 26 contributions toward your home mortgage. At the end of the year, that actually equates to 13 full monthly payments versus the 12 you would have made with your standard repayment schedule.
This additional payment each year can significantly reduce your principal balance, meaning that youll pay off your home even faster than planned.
Lets say that you have a $200,000 mortgage loan at a rate of 4.00% for 30 years. If you pay according to your lenders standard amortization schedule, your loan will take you 30 years to repay.
However, by paying biweekly and essentially making one extra monthly payment a year youll actually pay your loan off midway through year 25. Think of all the things you could do being mortgage-free for nearly 5 extra years!
|Standard Repayment Timeline|
Refinance To A Shorter Loan
Has your income increased? If so, you may want to consider refinancing to a shorter term. Refinancing your mortgage allows you to save money on interest without worrying about penalties or scheduling extra payments. It also allows you to fully own your home much faster.
Keep in mind that refinancing your mortgage to a shorter term will increase your monthly payments. Do the math and make sure you can cover the extra financial burden before you make that move.
Great news! Rates are still low in 2022.
Missed your chance for historically low mortgage rates in 2021? Act now!
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What The Early Mortgage Payoff Calculator Does
Do you want to pay off your mortgage early? Maybe you have 27 years remaining on your home loan but you would rather pay it off in 18 years instead. The early payoff calculator demonstrates how to reach your goal.
The mortgage payoff calculator shows you:
How much more principal you would have to pay every month so you can pay off the loan in a certain number of years.
How much interest you would save by paying off the loan early.
There are many reasons you might want to accelerate the mortgage’s payoff, but the motivation usually boils down to either or both of these:
You want to own your home free and clear by a milestone in life, such as your retirement or the beginning or end of your kids’ college years.
You want to reduce the total interest you pay over the life of the loan.
To steadily pay off the mortgage early, you need to know how much more to pay toward the principal balance every month to accomplish that goal. This calculator lets you do that.
When paying down the principal on a mortgage faster, keep in mind that each servicer has its own procedures for assuring that your extra payments go toward the principal balance instead of toward future payments. Contact your servicer for instructions.
Mortgage Amortization: Learn How Your Mortgage Is Paid Off Over Time
- While your mortgage payment stays the same each month
- The composition changes over time as the outstanding balance falls
- Early on in the loan term most of the payment is interest
- And late in the term its mostly principal that youre paying back
Ever wonder how your home loan goes from a pain in your neck to real estate free and clear?
Well, it all has to do with a magical little thing called mortgage amortization, which is defined as the reduction of debt by regular payments of interest and principal sufficient to pay off a loan by maturity.
In simple terms, its the way your mortgage payments are distributed on a monthly basis, dictating how much interest and principal will be paid off each month for the duration of the loan term.
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How To Use The Early Mortgage Payoff Calculator
To fill in the calculator’s boxes accurately, consult a recent monthly statement or the first page of the Closing Disclosure that you received when you closed on your mortgage.
Under Loan term , enter the number of years for which your home is financed.
Under What was your mortgage amount?, fill in the loan amount. In the Closing Disclosure, you can find this on the first line of the Loan Terms section.
Under Interest rate, enter the percentage.
Under How many years are left on your mortgage?, you’ll need to enter a whole number, so round up or down.
Likewise, under In how many years do you want to pay off your mortgage?, you’ll have to enter a whole number, rounding up or down.
Under How much do you still owe ?, look for this figure in a recent monthly statement, or contact the mortgage servicer. Or you can use NerdWallet’s mortgage amortization calculator and drag the slider to find out how much you still owe.
Early Mortgage Payoff Examples
Imagine a $500,000 mortgage with a 30-year fixed interest rate of 5%. If you paid an extra $500 per month, youd save around $153,000 over the full loan term and it would result in a full payoff after about 21 years and three months.
If you had a $400,000 loan amount set at 4% on a 30-year fixed, paying an extra $100 per month would save you nearly $30,000 and youd pay off your loan two years and eight months early.
If you had a $300,000 loan amount set at 4.5% on a 30-year fixed, paying an extra $250 per month would save you almost $70,000 and youd pay off your loan seven years and six months ahead of schedule.
Or consider a $600,000 loan amount set at 6% for 30 years. Paying an extra $1,000 per month would save a homeowner a staggering $320,000 in interest and nearly cut the mortgage term in half. To be more precise, itd shave nearly 12 and a half years off the loan term.
The result is a home that is free and clear much faster, and tremendous savings that can rarely be beat.
The list goes on and the savings may shock you. While most people tend to be alarmed by the amount of interest they pay the bank over 30 years, its equally shocking how much you can save simply by paying a little extra.
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