Losing The Benefits Of Interest Deductions
Before deciding to pay off a mortgage early, it would be a good idea to weigh the pros and cons. The interest charged on up to $750,000 of mortgage debt used to purchase a principal residence can be used as a deduction on taxes in the year that it is paid. Because most of the monthly payments in the early years of a loan are interest, this can really add up. The mortgage interest deduction to homeowners is a very popular subsidy. However, the benefit would be lost if the mortgage is paid off early. In years gone by interest paid on home equity loans or HELOCs was tax deductible, but that is no longer the case in 2018, as equity debt is no longer treated like mortgage debt unless it is obtained to build or substantially improve the homeowner’s dwelling.
You Dont Have Retirement Savings
If you dont have money put aside for retirement or IRA account), that should probably be a priority. The longer you wait to put money towards retirement, the more compound interest that you miss out on. Depending on your situation, it might be best to begin investing in your retirement for a while before worrying about getting rid of your mortgage faster.
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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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.
What Are My Options For Paying Off My Mortgage Faster
The fundamental plan is to increase the money coming into your household and reduce any other expenditure other than your mortgage repayments. All available funds will need to be channelled into your mortgage to pay it off as quickly as possible.
Plan and prioritize
Here comes the hard part! To pay off your home in 5 years, youre going to have to prioritise mortgage repayments over everything else . You need to decide what youre prepared to sacrifice to be debt-free in 5 years. Go on a blitz and cancel all the subscriptions, memberships and regular payments that arent absolutely essential in your life.
Cut back and cut out
Cut back and reduce everything you possibly can. Use Savvy to compare the cost of your car insurance, your home and contents insurance and your health insurance to ensure youre getting the very best deals . Switch to better plans or lower interest rates wherever possible, which includes your gas, electricity, phone and internet plans too.
Make sure all your interest rates are low
Next, make sure youre not wasting your hard-earned money by paying unnecessarily high interest. Pay off all your credit cards, personal loans, car loans and store lines of credit as a priority, because these are likely to have a higher interest rate than your home loan.
Compare loan options with Savvy
Sacrifice luxuries into your mortgage
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Choosing A Good Mortgage Term
A mortgage term is the number of years you are expected to pay your mortgage loan before the house becomes your own. Mortgage terms are usually flexible, meaning you can extend them or shorten them by completing your payment before the time elapses. One key to helping you pay off your mortgage loan quickly is choosing a suitable mortgage term. While 30 years is prevalent, mortgage term options of 5 years, ten years, 15, and 20 years exist. Selecting a term such as ten years or 15 years will help you pay off your mortgage quickly by reducing the interest while paying more to your principal instead of the mortgage company.
Consult A Pro To Find The Right Home
For help finding houses that fit your budget, or if youre ready to sell your home, consult an experienced real estate agent whose advice will save you time and money.
A buyers agent can help you navigate through the home-buying process. In some cases, they may even be able to help you find a house before it hits the market, giving you a competitive edge. And when it comes to making an offer, your agent will negotiate on your behalfso that you dont pay a penny more than you have to.
You can find a trustworthy real estate agent in your area through our nationwide Endorsed Local Providers network. RamseyTrusted ELP agents understand how important it is to buy a home you can afford. They wont pressure you to consider homes that will bust your budget.
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How To Pay Off A Loan Faster
The first rule of overpaying is to speak to the lender to ensure that any extra money you send comes off the principal debt, and not the interest. Paying off the principal is key to shortening a loan. Our Loan Payoff Calculator shows you how much you might save if you increased your monthly payments by 20%.
Can I Pay Off My Mortgage Early
For most people, a mortgage payment is the largest monthly expense. It is possible to get rid of that mortgage payment — but first, find out if your lender charges a prepayment penalty.
A prepayment penalty is a fee some lenders charge customers who pay off a mortgage loan early. Mortgage interest is the lifeblood of mortgage companies, and when you pay off your principal balance early, the lender loses out on years of interest payments you would have made. That’s why lenders will sometimes charge a prepayment penalty when a mortgage is paid off early. Check your mortgage contract or call your lender to learn whether it charges a prepayment penalty for early payoff.
A quick note about prepayment penalties: Even if your lender charges a prepayment penalty, there is likely a loophole. For example, most lenders allow you to pay off up to 20% of your principal balance each year without penalty. Say your principal balance is $200,000. You can pay an extra $40,000 each year toward the mortgage balance without a penalty.
If you’re one of the lucky borrowers whose lender does not charge a prepayment penalty, you’re good to go. And even if your lender does charge a prepayment penalty, weigh the cost of the penalty against how much money you save by paying the mortgage debt off early.
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Should I Pay Off My Mortgage
Now that weve covered how to pay off a mortgage in five years and what lifestyle changes itll take, you should take a moment and consider if this is actually a doable task for you. Like we mentioned in the first strategy, you should never throw all of your savings at paying a mortgage. Maybe you technically have enough saved to pay off your principal loan, but its never a good strategy to have all your eggs in one basket. Throughout the mortgage repayment process, you should still have an emergency fund set aside and be contributing to your retirement savings. Dont drain these accounts just to pay off your loan, no matter how tempting it may seem.
In addition, you definitely should not rack up credit card debt in order to pay off your mortgage early. Most credit cards will have a much higher interest rate than your mortgage, so you would actually be losing money. However, if your other financial assets are secure and you have the funds to pay off your mortgage in five years, then this is a colossal achievement and you should be proud of your journey out of debt!
We hope this guide to how to pay off your mortgage in five years will help you get off on the right foot when starting out as a homeowner, or as a homeowner looking to pay off your mortgage early. As always, you can visit Turbo for expert financial advice, from taxes to mortgages.
Pay Off Credit Card Debt
If youre having a hard time with credit card debt like many Americans, its more than likely you dont have enough available cash to commit to paying extra on your mortgage. Your credit card rates are going to be significantly higher than your home loan interest rate so it makes sense to tackle credit card debt first. Credit cards typically carry the highest cost to borrow with an average variable interest rate of about 16%.
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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.
How To Calculate Extra Mortgage Payments
Using our Mortgage Payment Calculator, you can crunch the numbers and discover how much you could save in interest, or how much you would need to pay each month to pay your loan off sooner.
For example, according to the calculator, if you have a 30-year loan amount of $300,000 at a 4.125% interest rate, with a standard payment of $1,454, if you increase your monthly payment to $1,609, you could pay your loan off five years and one month earlier while saving $43,174 during the loans lifetime.
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Get A Loan Modification
If your mortgage payments are unaffordable but you want to get back on track and potentially pay the loan off early, consider a home loan modification. Generally reserved for borrowers experiencing financial hardship, a loan modification entails the lender adjusting the interest rate or loan term to help bring the loan current.
With this option, you could save on interest and pay the loan off faster. There could be consequences for your credit, however, depending on how your lender or servicer reports it to the credit agencies, so be sure to discuss this with your lender upfront.
One Extra Payment A Year
Making one additional payment per year offers the same benefits as making biweekly payments. You not only pay down your mortgage principal faster, you save thousands of dollars in the long run. There are several ways to swing one extra payment each year:
- Use your tax refund or bonus.
- Put a little aside each month and make one extra payment in December.
- Take on a side hustle you enjoy, and dedicate your earnings to an extra mortgage payment.
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Come Up With The Money
Once youve got a specific dollar figure, you can lock down sources of the extra money required to climb this financial mountain. Not all of the following steps ensure success but in combination they may get you to the summit.
Cut back on spending and stick to a budget In order to make the goal of paying off your mortgage in five years or less, most households need to cut back on spending and stick to a budget. With the goal of paying off the home loan in such a short timeframe, it is short-term pain for a long-term gain. And, you may actually decide that some of those previous purchases were more frivolous than they were necessary.
Boost your monthly income Some homeowners may not have the necessary income to make paying off their home within five years a reality. However, they shouldnt give up on their goal. Boosting your income with a side hustle, promotion or new job could make your dream a reality. There are numerous side hustles available and many employees are significantly increasing their income in the current job market. If you need to learn a new skill to qualify for a promotion or new job, many free online courses are available on the internet.
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.
Consolidate debt with a cash-out refinance.
Your home equity could help you save money.
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Make One Extra Mortgage Payment Each Year
Making an extra mortgage payment each year could reduce the term of your loan significantly.
The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, youll have paid the equivalent of an extra payment by the end of the year.
Lose Liquidity & Hinder Cash Flow
Paying off your mortgage early will also reduce your liquidity because youll no longer have that money available to use as you please.
Additionally, if you ever need to borrow money in the future, having a mortgage can be helpful because it shows that youre good at managing debt. Paying off your mortgage early could hinder your ability to borrow money in the future if you ever need to.
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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.
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Paying off a mortgage early can save hundreds of thousands of dollars in interest payments. Paying a 30-year mortgage off is as few as five to seven years takes a solid plan of action and budget you must stick to. Not everyone has the means to do this.
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