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?
Make Sure Your Mortgage Company Accepts Biweekly Payments Without Fees
You need to confirm that your lender actually accepts biweekly paymentssome dont. And even if they do, they may charge fees for the option. Never go for that! It defeats the whole purpose of biweekly payments, which is to save yourself money in the long run.
If your lender cant allow you to set up normal biweekly payments without fees, just open a separate bank account dedicated to making your mortgage payment. You can deposit your half-payment amount there every two weeks and use that money to make your full monthly mortgage payment . Now remember: Youll make your mortgage payment every other time you make a deposit. So youll end up with your planned 13 payments by the end of the year, while still following your mortgage companys rules about the timing of the payments. Win-win!
How To Significantly Pay Down Your Mortgage In 12 Months
Every month the bills roll in, and theres one that, for many, is particularly brutal: the mortgage. The average monthly mortgage payment in the U.S. is $1,100, according to the U.S. Census Bureau a hefty hit for the typical American who is living paycheck to paycheck. Though the goal, of course, is to pay off the mortgage completely so that that astronomical bill ends at last, that can take an exceedingly long time. According to recent research from LendingTree, around 10 million Americans over the age of 65 are still burdened with mortgage payments.
If you want to avoid owing money on your home in your golden years, your best bet is to commit to paying down your mortgage ASAP. It may sound daunting, but wiping out your mortgage debt sooner than later is totally doable. In fact, you can make impressive headway in just one year.
Heres what the experts recommend to significantly pay down your mortgage in 12 months.
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Ways To Pay Off Your Mortgage Early
Okay, you probably already know that every dollar you add to your mortgage payment puts a bigger dent in your principal balance. And that means if you add just one extra payment per year, youll knock years off the term of your mortgagenot to mention interest savings!
To get serious about paying off your mortgage faster, here are some ideas to help:
What Are The Current Terms Of Your Mortgage
Before you attempt to pay off your mortgage early, its important to gain a concrete sense of the conditions you established with your mortgage lender. Knowing the length of your loan term will help you determine how long it will take you to pay off your mortgage if you make the minimum payment each month. Being aware of your interest rate will tell you how much interest youre currently paying on the remaining balance of your mortgage principal.
You should also see whether you agreed to a fixed- or adjustable–rate mortgage . If you have an ARM loan, youll want to know how market rates have changed since you first obtained your mortgage. If market rates are higher, paying off your mortgage early may be the right move.
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Mistakes To Avoid When Paying Off Your Mortgage Early
If you can afford to pay off your mortgage ahead of schedule, youll save some money on your loans interest. In fact, getting rid of your home loan just one or two years early could potentially save you hundreds or even thousands of dollars. But if youre planning to take that approach, youll need to consider if theres a prepayment penalty, among other possible issues. Below are five mistakes that you should avoid when paying your mortgage off early. A financial advisor can help you figure out your mortgage needs and goals.
Make Extra House Payments
Lets say you have a $220,000, 30-year mortgage with a 4% interest rate. Our mortgage payoff calculator can show you how making an extra house payment every quarter will get your mortgage paid off 11 years early, and save you more than $65,000 in interestcha-ching!
But before you start making extra payments, lets go over some ground rules:
- Check with your mortgage company first. Some companies only accept extra payments at specific times or may charge prepayment penalties.
- Include a note on your extra payment that you want it applied to the principal balancenot to the following months payment.
- Dont shell out your hard-earned cash for a fancy-schmancy mortgage accelerator program. You can accomplish the same goal all by yourself.
What Does Paying Your Mortgage Biweekly Do?
Some mortgage lenders allow you to sign up for biweekly mortgage payments. This means you can make half of your mortgage payment every two weeks. That results in 26 half-payments, which equals 13 full monthly payments each year. Based on our example above, that extra payment can knock four years off the 30-year mortgage and save you over $25,000 in interest.
Are Biweekly Mortgage Payments a Good Idea?
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What Are Biweekly Mortgage Payments And Are They A Good Idea
6 Minute Read | September 24, 2021
Theres something simple you can do to cut years off your mortgage payoff date. Its called making biweekly mortgage payments! Its a smart way to add some speed as you dash out of debt. But before you set up biweekly payments on your mortgage, there are several things you should know. Lets see what they are.
Making Extra Payments On Mortgage: Is It The Right Move
The short answer is, it depends. Some homeowners will want to explore the possibility of a future lower mortgage payment by paying down principal now. You may feel strongly that shortening the length of your loan is ideal. Or you may want to build wealth separately and save the difference. Essentially it comes down to a few financial and homeownership goals that help you either save time, money, or a little of both.
Not every homeowner will benefit from making an additional mortgage principal payment here and there. Before doing anything else, use the above extra mortgage payment calculator and see how much you may save in the long run.
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How To Pay Your Mortgage Faster
This article was co-authored by Ryan Baril. Ryan Baril is the Vice President of CAPITALPlus Mortgage, a boutique mortgage origination and underwriting company founded in 2001. Ryan has been educating consumers about the mortgage process and general finance for almost 20 years. He graduated from the University of Central Florida in 2012 with a B.S.B.A. in Marketing.There are 9 references cited in this article, which can be found at the bottom of the page. This article has been viewed 61,398 times.
Prepaying your mortgage can shorten the life of the loan and save you a large amount of money in interest. There are two ways to do this: you could contribute extra money every month or you might be able to take advantage of falling interest rates by refinancing the loan. Whichever method you choose, the important thing is to make consistent payments. This article will show you how to save money by shortening your mortgage.
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- Youll get a completely online application process with less paperwork, and you can track the status of your mortgage application.
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Read Also: Rocket Mortgage Requirements
Increase Your Payment Frequency
While the standard interval to pay a mortgage is once a month , you can also choose to pay semi-monthly , bi-weekly or weekly . Because mortgage interest accumulates daily, the greater the frequency, the less interest you will pay, and the faster youll pay off your mortgage.
You could also choose an accelerated bi-weekly schedule, which is essentially the amount of a monthly mortgage divided by two, and you pay that amount every two weeks. By doing this, you end up paying a 13th-month mortgage payment, which goes entirely toward reducing the mortgage principal. This strategy alone would shave more than three years off your mortgage and save nearly $25,000 in interest compared to the basic monthly mortgage above with no prepayments .
If you really want to get a bang for your buck, try combining an increase in payment frequency along with a regular pre-payment amount. As you see in the chart below, you could shave nearly seven years off a $300,000 mortgage by adding an extra $100 to each accelerated bi-weekly payment, or pay off the mortgage nearly 10 years sooner if you added an extra $200 to each payment. In the latter case, youd have also saved a whopping $70,000 in interest compared to the basic monthly mortgage with no prepayments .
|Calculation summary for $300,000 mortgage|
Pay More Than The Minimum
Pay off your debt and save on interest by paying more than the minimum every month. The key is to make extra payments consistently so you can pay off your loan more quickly. Some lenders allow you to make an extra payment each month specifying that each extra payment goes toward the principal. Before you begin, check the terms of your loan to determine whether additional fees or prepayment penalties may apply.
Also Check: Chase Recast
Try Our Mortgage Payment Calculator
Check out our mortgage payment calculator and find out how quickly you can pay off your mortgage with extra monthly or annual payments, switching to biweekly payments, or opting for 15-year term mortgage instead of a 30-year term. When you plug in the details, youll get an amortization table that shows you just how quickly you can pay off your mortgage with each strategy. See what makes the most sense for you, then start taking steps to put your plan into action and own your home a whole lot faster.
Reduce Your Interest Payments
As you pay off your mortgage, the first payments you make primarily go toward the interest on your loan. The longer that you carry your mortgage, the more youll have to pay in interest over time. Choosing to pay your loan off early can help you save a significant amount of money by avoiding additional interest charges. This is especially true for homeowners who had locked their mortgage into a higher interest rate originally.
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Paying Down Your Mortgage Example
So lets assume its still the early days for your mortgagewithin the first decade. Lets say you have a 30-year fixed $200,000 loan at a 4.38% rate that amounts to a lifetime interest charge of $159,485 if you pay the usual 12 times a year. Make that a lucky 13 payments each year, though, and you save $27,216 in interest overall. If you kicked in an extra $200 each month, youd save $6,000 in 10 years, $50,745 in 22½ yearsand youd have the mortgage paid off, too.
Increase Your Cash Flow
Since your mortgage is a major monthly expense, paying it off will provide you with a considerable amount of money that you can put to use. With the increase in cash flow, you can grow your savings, make improvements on your home, travel to new parts of the world or invest in the stock market. Paying off your mortgage early affords you the freedom to do what you wish with your money.
Reduce Your Balance With A Lumpsum Payment
An alternative to recasting is to make lumpsum payments to your principal when you can.
Have you inherited money, earned large bonuses or commission checks, or sold another property? You could apply these proceeds to your mortgages principal balance and be debtfree a lot sooner.
Since VA and FHA loans cannot be recast, lumpsum payments might be the next best thing. Also, youll save yourself the bank fee for recasting.
With some mortgage servicers, you must specify when extra money is to be put toward principal. Otherwise the extra money could be split between the interest and the principal as it is divided within a regular monthly mortgage payment.
Check with your servicer if you dont know how additional payments will be applied.
Put Your Raise To Work
Do you get a bonus from work? What about an annual raise? When your annual, monthly or hourly payroll increases, consider applying the extra to your mortgage. You wont miss the money as youre already disciplined about living on the original sum you were earningand the extra funds will go a long way to reducing the principal mortgage debt.
When Balancing Early Mortgage Repayment And Other Financial Responsibilities Works
You should have a robust household emergency fund before you think about paying extra cash toward your mortgage. An unexpected auto bill, medical expense or other cost can upset your budget if you dont have any liquid cash.
While its possible to take cash out of your home equity with a refinance, this process takes time, which you may not have in an emergency. Make sure you have plenty of money set aside for emergencies before you put any extra toward your mortgage loan.
You may also want to put off paying off your mortgage if you have another big expense coming up. Your priority should be putting money into your 401 or IRA. You might also want to consider diverting your extra money into a childs college fund or into savings for an upcoming vacation or wedding.
Theres no point in paying off your mortgage if it means going back into debt in the future.
See how much cash you could get from your home.
Apply online with Rocket Mortgage® to see your options.
Allot All Or A Portion Of All Extra Cash To Your Mortgage
Received a tax refund? Got a bonus at work or a large cash gift? While choosing how you want to save and spend your extra funds, consider funneling at least a portion into your mortgage. Making your mortgage a priority in these sorts of instances ensures that you dont miss an opportunity to take a bite out of what you owe, and it can be done while also setting money aside for savings and fun.
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Should You Pay Off Your Mortgage Early
Whether you should pay your mortgage off early depends on many factors, including the interest rate of your current loan and your personal risk tolerance.
Start by considering the opportunity cost. If you repay your mortgage ahead of schedule, youre putting money into the mortgage when you could have used those funds for other financial priorities. Youll save on interest, of course, but if you invested the extra payments elsewhere instead of putting them toward your mortgage, you might find youd have earned a higher return.
On the other hand, if you know youre likely to spend that extra money if you dont put it toward your mortgage, making additional payments can be a good idea. The peace of mind that you get from owning your home mortgage-free can also be worthwhile, and is important to consider.
Also, think about how much cash you have available for emergencies. You dont want to tie all of your money up in your home and have no way to access it quickly if you encounter a crisis.
Ultimately, with mortgage rates still low, its generally better in the long run to hold a mortgage with a low rate now and to invest your extra cash. Still, you can check Bankrates mortgage payoff calculator to see how much you can save by settling your mortgage early if youre set on doing so.
Accelerate Your Mortgage Payment Plan
Get creative and find more ways to make additional payments on your mortgage loan. Making extra payments on the principal balance of your mortgage will help you pay off your mortgage debt faster and save thousands of dollars in interest. Use our free budgeting tool, EveryDollar, to see how extra mortgage payments fit into your budget.
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Expert Tips To Pay Down Your Mortgage In 10 Years Or Less
Purchasing a home is a dream for pretty much everyone. But, taking on that massive debt can prevent you from retiring earlier, sending the kids to college, or taking that dream vacation. Like any other debt, if youre able to get rid of your mortgage as soon as possible, the better off youll be down road.
This may sound like an uphill battle that you cant win, but if you follow these 12 expert tips, you may be able to actually pay your mortgage off within a decade.