Refinance Your Mortgage Into A Shorter
Got a 30-year mortgage? Refinancing it as a 15-year loan will blast you through that mortgage a whole lot faster, and will probably get you a better interest rate as well — shorter loan terms are typically paired with lower interest rates. And thanks to the shorter time frame, you’ll pay a lot less money in interest — so the payments on a 15-year loan are not double the payments of a 30-year loan they’re significantly less. Pull up a mortgage payoff calculator and play around with the numbers to see how much you’d have to pay to do a 15-year refinance. And if the monthly mortgage payment for such a loan would be more money than you can afford, consider a 20-year loan instead.
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.
Can You Pay Off A Mortgage Early
Yes, its possible to pay off your mortgage early. In fact, doing so can help you save a great deal of money in the long term. Making extra payments, even if just in small amounts, can help you own your home outright sooner. Extra payments, refinancing or adjusting your repayment schedule can be useful methods for paying off your mortgage earlier.
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Celebrate Your Wins And Milestones
The goal of paying off your mortgage early is a big, serious commitment, and one that you should stay focused on consistently. However, there will be times that you just dont want to think about it one more minute.
In that case, take a short break from it. You still have to live your life in a way that is manageable and doesnt drive you crazy, right? In addition, it is really difficult to stay motivated without any sort of attaboys or attagirls along the way.
Schedule a celebration at different milestones along the way. Perhaps after you pay off $5,000 or $10,000 of principal, you will go out for a nice dinner at a favorite restaurant. Maybe after you have paid off $25,000 of the principal, you decide to take a long weekend away, an adventure in a place you have never been. Celebrate these wins, even when they are small ones because small wins add up to the BIG win later.
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.
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Pay Fortnightly Instead Of Monthly
A simple yet effective strategy for paying off your loan faster is switching from monthly to fortnightly repayments. This is because there are 26 fortnights in a year, but only 12 months. So by paying fortnightly, you will be making the equivalent of 13 monthly payments every year instead of 12. This can end up chipping away at the principal and interest, therefore reducing the life of your loan.
Avoid Taking On Other Debts
If youre committed to aggressively paying off your mortgage, you likely wont have the financial bandwidth to take on other debts. This means making your current car last for as long as possible and not going back to school right away.
Paying off medical debt can be financially draining, so make sure your health insurance will cover you should the need arise before you dedicate a large chunk of your disposable income to owning your house outright.
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Set Up A Biweekly Payment Schedule
Some lenders will let you set up your payment schedule this way. You pay half your mortgage every other week, which adds up to one whole extra payment per year.
This is because there are 52 weeks per year, which is 26 half-payments, or 13 full payments. Thats 1 more than the 12 payments youd make on a monthly schedule and you likely wont notice the difference in your day-to-day, especially if you get paid biweekly.
Kevin Bartlett, an agent in Estero, Florida, with more than six years of experience, has worked with several clients who paid off their mortgages early, explaining, When people want to pay off their mortgage early, they typically make double payments, every-two-week payments. So they have an extra payment by the end of the year.
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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Why You Mathematically Should Not Pay Off Your Mortgage Early
Mathematically, it doesnt make sense to pay off your mortgage early. With historically low-interest rates , it seems almost foolish to spend extra money to pay off your home early.
Think about it you could invest your money in an S& P Index Fund in the stock market and make an average of 8% each year. Thats a 5% difference between spending the money to get rid of a 3% interest rate on a mortgage versus investing it and making 8%.
Figuring In Financial Independence And Financial Security
However, the above scenario focuses entirely on a mathematical perspective. The calculations make sense mathematically if you ignore the curveballs life throws at us. If you invest your extra money but lose your job and can no longer afford your mortgage, the mathematical formula goes out the window.
My wife and I chose financial security rather than increasing our net worth. We did this by maxing out our retirement fund first and then spending every extra cent on paying off the mortgage.
I would never advise you to pay off your mortgage before investing for retirement.
By going this route, we wasted five years of extra returns but now we have no mortgage and can delegate even more money into investments.
To top it off, if I suddenly lost my job, I could get a minimum wage job and still not have to worry about moving or affording our house payment. To us, this financial security is worth its weight in gold.
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?
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Should You Pay Off Your Mortgage Faster
The answer to this question depends on the interest rate for your mortgage. In modern times when the pandemic and slowed economy have pushed interest rates so low, its not a bad idea to keep the 30-year mortgage.
One extra payment per year on a $200,000 loan at 2.75% interest only reduces the mortgage by three years and saves $12,000 in total interest.
Taking the monthly payment and investing it conservatively means you earn 4% per year on the investment, which means you gain $21,000 in interest over 30 years which means that by investing you are $9,000 ahead.
Thats a conservative figure on the investment, but everyone must remember that investment carries risk, and gains may not be steady. That being said, a 30-year loan at 2.75% is as close to free money as weve seen in a long time, so any gains on an investment should top that interest rate.
The surest way to reduce total interest is to transform a 30-year loan into 15 years. However, the budget must be able to afford the extra monthly payment.
In order, the considerations should go this way:
The worst, absolute worst, option would be to take money that could be used in important and vital ways and spending it lavishly on belongings and wasteful material goods. Is it worth buying that extra big-screen TV or more expensive car when it comes at the expense of a secure retirement or a year of college for your son or daughter?
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Pay All Extra Dollars To Repay Your Mortgage
Set aside every additional money you get from a bonus, salary increase, holiday money or graduation gift. Make sure you pay off debts that attract highest interest first.
Also, if you have an emergency fund saved up and you have mortgage debt, any extra money that you receive must go to the mortgage debt repayment and apply it to reduce the principal.
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Should I Pay Off My Mortgage
Just because you can pay off your mortgage early doesnt necessarily mean that you should. Of course, it would feel great to rid yourself of a huge financial burden like a mortgage. But if you really want to know if its a good decision, you have to look at the math.
There are pros and cons to paying off your mortgage early. Whether the pros outweigh the cons will depend on your overall financial situation.
Pay Off Your Other Debts First
The main key to paying off your mortgage quickly is to make big payments on it. Have you ever looked at your statement and noticed that if you simply pay the minimum and dont charge anything else to add to the balance, it will take you approximately 17 years to pay it off?
Just like a credit card, if you simply make the minimum payment on your mortgage, you will be paying on loan for many years, if not decades.
To be able to make hefty principal payments on your mortgage, you should eliminate all of your other debt first. Can you imagine how much you would be able to throw at your mortgage if you had no credit card debt? No student loan debt? No car loan? If you are like most Americans, the amounts of those other debts will allow you to pay off your mortgage faster than you thought possible.
So get busy paying off your other debt. Noted financial guru Dave Ramsey suggests listing your debts smallest to largest and paying extra on the smallest one until it is done. Then take the money you were paying on the smallest one and add that amount to what you are paying on the next smallest one.
This snowball approach allows you to keep constant momentum. As you attack the larger debts, you have a larger amount to pay toward it.
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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.
Can You Get A Savings Rate Higher Than Your Mortgage Interest Rate
If youre already contributing to a pension scheme, rather than pay off your mortgage it might make more sense to put your money into a savings account.
Thats if you can find one which pays a higher rate of interest than the rate youre being charged on your mortgage.
To get an accurate comparison, work out what the rate amounts to, after youve paid tax on your savings.
Some savings accounts such as ISAs or some National Savings & Investments accounts offer tax-free returns you can benefit from.
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Make One Extra Payment Each Year
If the thought of bi-weekly payments seems daunting but you like the idea of making an additional payment each year, you can accomplish the same goal by committing to just one extra payment a year. This way, you’ll only feel the squeeze once a year and you’ll still shorten the life of your loan by several months, or even years. Use a work bonus, tax refund, or another windfall to make that once-a-year payment.
Another easy way to make that extra payment is to spread it out throughout the year. Divide your monthly payment by 12 and then add that cost to your monthly payments all year long. You’ll be making a full extra payment over the course of the year while hardly feeling the pinch.
Consider An Offset Account
An offset account is a savings or transaction account linked to your mortgage. Your offset account balance reduces the amount you owe on your mortgage. This reduces the amount of interest you pay and helps you pay off your mortgage faster.
For example, for a $500,000 mortgage, $20,000 in an offset account means you’re only charged interest on $480,000.
If your offset balance is always low , it may not be worth paying for this feature.
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Downsides To Paying Off Your Mortgage Early
Most financial experts encourage homeowners to put their extra money into retirement accounts instead of paying off mortgages early.
The reason? For almost a century, the stock market has earned a 10% average annual rate of return. That means homeowners could potentially earn more by investing in the stock market than theyd save by paying down their mortgage balance.
Plus, some homeowners write off their mortgage interest payments as a tax deduction which means they could get some of that money back at tax time.
There are other potential drawbacks to consider before paying off your mortgage early:
Finally, before paying extra on the mortgage, many personal finance experts recommend building an emergency fund in case you lose a job, get injured, or face other financial troubles. Without emergency funds in a savings account, you may have to use higherinterest credit cards to pay unexpected expenses.
Questions to ask before paying off your mortgage early
Is paying off your mortgage early the best financial decision for you and your family? It depends on your unique situation and financial goals.
Here are a few questions to help guide your decision:
If your main objective is to be debtfree as soon as possible, then look into one of the five strategies above to pay off your mortgage faster. You may have already paid off other personal debt like student loans or credit cards it could make sense to target your mortgage, too.
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.
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The Bottom Line: Reduce Your Debt But Do So Wisely
If you think paying off your mortgage early is right for you, check out the Rocket Mortgage®Amortization Calculator to see how much money youll save by making extra payments or a lump sum payment.
If youd like to refinance your loan, apply online, or speak to one of our Home Loan Experts by calling 452-0335.Were always happy to discuss your options to help you determine whats best for you!