Use A 100% Offset Account
Using an offset account is a smart way of saving on your home loan. When you manage it well, you can save substantial amounts of interest.
If you have an offset account or you’re thinking about setting one up, check out our article on how to pay less interest on your home loan with an offset. You’ll find some helpful tips and things to consider.
Looking to change your home loan? Use our home loan selector tool or call .
How To Pay Off A Mortgage In 5 10 Or 15 Years
Lets put a few examples in practice to see how much money you can actually save by paying off your mortgage faster.
Well assume a $275,000 home loan with a 3% interest rate.
Years to payoff
But this does go to show how much money can be left on the table if you simply make the minimum payment over the life of the loan. Though it may feel like youre throwing cash into the void when you slip an extra $500 toward your principal here and there, every dollar really does count!
Reduce Your Payments As A Last Resort
When variable interest rates fall, some people like to reduce their repayments. Itâs tempting, but think about keeping your repayments as they are. It’ll mean you end up paying more off your loan sooner.
On the other hand, if rates keep steady for a while, think about adding an extra $20 dollars on top of your normal repayments. It really does add up.
If youâre thinking about applying for an interest-only loan structure to reduce your payments, do your research. Australian Securities and Investments Commission have some useful information for customers using an interest-only repayment period as part of their loan term. Check out their MoneySmart, opens in new window guidance for some easy to follow infographics highlighting the pitfalls and benefits of this type of lending structure. You can also find examples of how much you may expect to pay for this type of loan structure.
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How To Pay Off Your Mortgage In Half The Time
What if we combined some of these little known mortgage pay off tricks?
Could we cut our 30-year mortgage in half?
Which two tips sound the most reasonable to use?
Lets combine rounding up along with paying extra at the start of the mortgage.
These allow for the most flexibility and will show us what a little extra payment does in the long run.
Why Paying Off Mortgage Early Is Bad
Your home will be a disproportionate percentage of your net worth. By paying off your mortgage early, it’s likely that a large amount of your net worth will be tied up in your home. This comes with its own risks. Real estate is often considered a safer investment than stocks, but it’s not without risks.
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Overview: Paying Off Your Mortgage Early
Every time you make a mortgage payment, its split between your principal and your interest. Most of your payment goes toward interest during the first few years of your loan. You owe less in interest as you pay down your principal, which is the amount of money you originally borrowed. Most of your payment goes toward interest during the first few years of your loan. You owe less in interest as you pay down your principal. At the end of your loan, a much larger percentage of your payment goes toward principal.
You can apply extra payments directly to the principal balance of your mortgage. Making additional principal paymentsreduces the amount of money youll pay interest on before it can accrue. This can knock years off your mortgage term and save you thousands of dollars.
Lets say you borrow $150,000 to buy a home at 4% interest with a 30-year term. By the time you pay off your loan, you will have paid a whopping $107,804.26 in interest. This is in addition to the $150,000 you initially borrowed.
Now, lets say that you pay an extra $100 every month toward a loan with the exact same term, principal and interest rate. At the end of the term, you will have paid $82,598.49 total in interest. Thats $25,205.77 less than you would have paid if you didnt make any extra payments. Youll also pay your loan off 74 months earlier than you would if you only paid your premium each month.
Is It Better To Keep A Mortgage Or Pay It Off
keeping the mortgage. Less debt increases your monthly cash flow. If you financed or refinanced in the past five years or so, you have a low mortgage rate. … Investing the money rather than paying off your mortgage may give you a higher return, especially in tax-advantaged or tax-free accounts.
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You Might Want To Pay Off Your Mortgage Early If
- Youre trying to reduce your baseline expenses: If your monthly mortgage payment represents a substantial chunk of your expenses, youll be able to live on a lot less once the payment goes away. This can be particularly helpful if you have a limited income.
- You want to save on interest payments: Depending on a home loans size and term, the interest can cost tens of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses. While its true you may lose the tax deduction on mortgage interest, you may still save a considerable amount on servicing the debt. Youll have to reckon with a decreasing deduction anyway, as more of each monthly payment applies to the principal.
- Your mortgage rate is higher than the rate of risk-free returns: Paying off a debt that charges interest can be like earning a risk-free return equivalent to that interest rate. Compare your mortgage rate to the after-tax rate of return on a low-risk investment with a similar termsuch as a high-quality, tax-free municipal bond issued by your home state. While mortgage rates are currently low, theyre still higher than interest rates on most types of bondsincluding municipal bonds. In this situation, youd be better off paying down the mortgage.
- You prioritize peace of mind: Paying off a mortgage can create one less worry and increase flexibility in retirement.
Should You Pay Off Your Mortgage The Answer May Surprise You
Your financial priorities are different than your neighbors or your best friends or your parents.
Take a home mortgage, for example. Plenty of people are happy with paying 15 or 30 years on a mortgage, while others are anxious to get rid of any debtincluding their home loanas soon as possible.
Which is right? As with most things related to money, its complicatedand more personalthan a single choice.
Heres what to consider if youre thinking about when to pay off your mortgage.
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Using Your 401 To Pay Off A Mortgage
Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
There are some understandable questions you might encounter as you plan for retirement: Is it sensible to be squirreling away money in an employer-sponsored retirement plan such as a 401 while simultaneously making a hefty monthly mortgage payment? Could it be better, in the long run, to use existing retirement savings to pay down the mortgage? That way, you’d substantially reduce your monthly expenses before you leave behind work and its regular paychecks.
Increase Your Regular Repayment Amount
Paying more than your required repayment amount is another way to reach your home ownership goal sooner.
Trevor decides to contribute an additional $386 per month on top of his $2,315 monthly home loan repayment, paying $2,701 each month. Over the course of 12 months he pays $32,412, which is roughly equivalent to two additional months’ worth of payments each year.
This will shave six years off Trevor’s 25-year loan term as well as around $80,000 in interest.
- Original home loan repayment: $27,780/yr x 25 years = $694,500
- Revised home loan repayment: $32,412/yr x 19 years = $614,948*
* Source: ASIC MoneySmart mortgage calculator.
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Set Up A Mortgage Offset Account
A mortgage offset account allows you to offset, or reduce, the interest charged on your home loan by letting you pay down the principal loan amount with your savings.
Say you have a home loan balance of $400,000, and you put $20,000 into an offset account. By doing this, youll only need to pay interest on a balance of $380,000 rather than $400,000.
The more money you have in an offset account, up to the balance of the loan, the bigger the savings and the faster your loan can be paid off.
Extra Mortgage Payments Vs Investing
Assume you have a 30-year mortgage of $150,000 with a fixed 4.5% interest rate. You’ll pay $123,609 in interest over the life of the loan, assuming you make only the minimum payment of $760 each month. Pay $948 a month$188 moreand youll pay off the mortgage in 20 years, and youd save $46,000 in interest.
Now, lets say you invested that extra $188 every month instead, and you averaged a 7% annual return. In 20 years, youd have earned $51,000$5,000 ahead of the sum you saved in intereston the funds you contributed. Keep on depositing that monthly $188, though, for 10 more years, and youd end up with $153,420 in earnings.
So while it may not make a huge difference over the short term, over the long term, youll likely come out far ahead by investing in your retirement account.
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Or Just Make An Extra Payment Each Year
This is a different tactic with the same results: Simply make one additional payment every year as a lump sum.
Which method is easiest for you will probably depend on how you receive your income in relation to other expenses but either strategy is helpful in the quest to pay off your mortgage faster.
Understand The Payoff Process For An Fha
If you have an FHA loan that originated between August 2, 1985 and January 21, 2015, well accept your payoff funds anytime. However, please ensure your payoff funds are received by the first business day of the month, otherwise an additional months interest will be charged per Federal FHA guidelines.
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How Would You Use The Money You’d Be Saving On Monthly Payments
If you’re paying off your mortgage early so you can have more monthly cashflow, you should have an idea of how you’ll use that extra money. If you want to cut out your $900 mortgage payment and invest $900 per month in its place, that could be a good use of the money.
Ultimately, it’s up to you how to spend the extra cash. But if you can’t think of what you want to do with the money, or if you’d spend it on frivolous purchases, paying off your mortgage early might not be the best financial move.
Recast Your Mortgage Instead Of Refinancing
Mortgage recasting is different from refinancing because you get to keep your existing loan.
You just pay a lump sum toward the principal, and the bank will adjust your payoff schedule to reflect the new balance. This will result in a shorter loan term.
One major benefit to recasting is that the fees are significantly lower than refinancing.
Typically, mortgage recasting fees are just a few hundred dollars. Refinance closing costs, by comparison, are usually a few thousand.
Plus, if you already have a low interest rate, you get to keep it when you recast your mortgage. If you have a higher interest rate, refinancing might be a better option.
Check with your lender or servicer if you like this option. Not all companies will allow a mortgage recast.
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Ways To Pay Off Your Home Loan Faster
Small changes now can mean big differences later to how much of your home loan you end up repaying and how long it takes.
If youve recently had a home loan approved or are already some way into your repayments, you may be thinking about how you can pay it off sooner rather than later. We explore some smart ways to shave interest and years off your mortgage.
Note that examples are indicative only, and outcomes assume that interest rates will not change and that all repayments are made on time.
Contact Your Local Taxing Authority
In most cases, your property taxes were also paid through an escrow account. With this account closed, youre responsible for paying these taxes yourself, too.
Notify your local taxing authority and let them know that youve paid off the mortgage loan. Youll receive a bill for property taxes, which you can pay monthly, quarterly, or annually.
Designate Any Spare Money To Pay Off Your Mortgage
Sometimes you experience a permanent boost in income, whether you asked for a raise or got a better job. In these cases, it makes sense to commit to making larger payments over a long period of time. However, in real life income is usually a bit messier than this. If youve had a windfall or youre taking on some temporary work for extra income, you wont necessarily be able to commit to a long-term plan to make larger payments month over month.
Whenever we come across a little extra cash, its tempting to spend it right away. However, you can also put this bonus cash towards your mortgage in one lump sum. By adding these extra funds to your regular mortgage payment, you can end up paying your mortgage off earlier without disrupting your usual income.
The Benefits Of Overpaying Your Mortgage
If you can afford to make extra payments, overpaying your mortgage means you pay less interest in the future and pay off your mortgage sooner. This means you could save a lot of money.
On a £150,000 mortgage at 5% with 25 years remaining, paying off a £5,000 lump sum reduces the interest by £11,500 and means you would repay it 18 months earlier.
Overpaying when interest rates are low means youll have a smaller mortgage too if there are higher interest rates in the future.
But depending on your circumstances, there are some other questions you need to ask yourself.
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Refinance With A Shorter
A shorter term on the mortgage means it goes away sooner, but at the cost of a much higher monthly payment and perhaps some out of pocket closing costs. Examine the loan closely.
The monthly payment on a 30-year, $200,000 mortgage at 2.5% would be $790 a month.
The monthly payment on a 15-year, $200,000 mortgage at 2.25 % would be $1,310.
Thats another $520 a month to finish paying off your mortgage 15 years sooner.30 Years vs 15 Years of Payments
|30 Years of Payments|
|*For a $200k mortgage|
The bottom line on this decision is the bottom line: Can you afford the higher monthly payment of a 15-year loan, or are you better off contributing extra each month when you can to a 30-year payment?
Find A Lower Interest Rate
Work out what features of your current loan you want to keep, and compare the interest rates on similar loans. If you find a better rate elsewhere, ask your current lender to match it or offer you a cheaper alternative.
Comparison websites can be useful, but they are businesses and may make money through promoted links. They may not cover all your options. See what to keep in mind when using comparison websites.
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Do You Have Other Debts To Pay Off
The general rule of thumb is that you should focus on paying off higher-interest debt before lower-interest debt. You may be paying a higher rate on a credit card or private student loan than on your mortgage, so you’d benefit more by paying those off early.
Don’t pay so much toward your higher-interest debt that you risk defaulting on mortgage payments, though. Yes, , and the issuer may take legal action if you default on card payments. But defaulting on mortgage payments can be an even bigger risk, because you could lose your home.
There’s no clear right or wrong answer about whether or not you should pay off your mortgage early. It depends on your situation and your personal goals.
How To Make An Early Payoff Of Your Mortgage A Reality
I know all of these options sound great in theory.
The problem though is that you need more money in order to pay extra on your mortgage each month.
As it stands now, money is already tight.
What can you do to earn extra money and pay off your mortgage faster?
There are all sorts of ideas out there.
You can learn about many ways to earn more money either through side hustles or even how to make more money at work by reading through the posts in the build wealth section of this site.
Just by cutting a few monthly expenses and doing a little work on the side could easily bring in $250 extra each month.
It may seem like a small amount, but it makes a big difference in the long run.
If you combine some of the tricks to pay off your mortgage faster and can put this extra $250 you earn towards your mortgage each month, you could pay off your mortgage in 10 years.
This is what I use to get a quick look at our net worth and investments.
The reason I do this is for motivation.
- Read now:
There are times when you would rather buy something you want instead of putting the extra money towards your mortgage.
But then I log into my Personal Capital account, see the progress we made and how close we are getting to being mortgage free and it helps to get me excited again.
So I highly recommend doing this as well.
You can open your free account by clicking the link below.
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