How To Pay Off Your Mortgage In 5 Years
Assuming your lender allows you to pay off your mortgage faster and that an early payoff is financially worthwhile, youll want to determine what the most realistic course of action will be based on your finances.
Many people who set the goal of paying off their mortgage in 5 years are a part of whats called the FIRE movement.FIRE stands for Financial Independence, Retire Early. These are aggressive plans to achieve financial independence, but they can be useful in helping a borrower with the means to do so reduce their debt faster.
So, how do you pay off your mortgage in 5 years?
There are a few steps that youll need to take in order to meet this goal. Regularly putting extra money toward your payments will prove to be worthwhile in the long run, but this should be done strategically. Lets take a look at the process.
When To Pay Off Your Mortgage Early
Paying down your mortgage balance early can remove some financial stress and allow you to focus on other financial goals. You might consider doing this if:
- Youre financially secure in other areas. If youve maxed out your retirement contributions, your emergency fund is well stocked, and youve paid down other debts, then paying down your mortgage could be the next logical step.
- You have a plan for the extra money in your budget. Its a good idea to make a plan for what youll do with the extra money when you no longer have a monthly mortgage payment. This can help ensure you dont spend the extra money on frivolous purchases. For instance, you might decide to invest the extra cash.
- You want to gain peace of mind. Some homeowners pay down their mortgages simply because they no longer want a large monthly payment hanging over their head. This can be especially helpful if youre about to retire or you live on a fixed income.
- You dont mind if your assets are less liquid. When you pay off your mortgage, you own the entire house and your net worth climbs. But if you ever need to tap your equity, youll need to either sell the home or take out a home equity loan. Both steps take time and come with extra costs.
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Should You Make Biweekly Mortgage Payments
Well that depends on how fast you want to pay off your mortgage! We assume youre down with being completely debt-free as fast as possible. In that case, youre on the lookout for every extra advantage you can find to make that happen.
Biweekly payments work really well for some peopleespecially people who get paid on that rhythm. After all, how convenient would it be to have the same number of annual payments as paychecks?
Those who like them appreciate the way you can almost sneak in that extra annual payment without much pain. Think about it this way. Which is easierscheduling 26 payments of X amount paid biweekly throughout the year? Or paying double that amount the first 11 months of the year, and four times that amount in December? Using the example of $1,600 a monthwhich is what the U.S. Census Bureau reports as the median mortgage paymentlets chart the differences.1
The biweekly system makes a lot of sense! It gives you the same overall speed boost youd get from doubling up your end-of-the-year payment, without the pain of actually forking over double the cash at one time. Youre basically spreading that extra payment across the year and getting into the habit of sending above the minimum payment every two weeks.
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Increase Your Loan Payments
Putting extra money towards your loan repayments – even a small monthly amount – can knock years off your loan term and save you in the long run. With a fixed rate loan you can increase your regular repayments to a maximum of 20% of your minimum repayment set in your loan agreement. And if you have chosen a floating loan you are able to increase your repayments to any amount at any point you choose.
Watch the savings add up
Example: $500,000 home loan at 3.69% p.a. for an initial term of 30 years.
Pay more each fortnight: just an extra $50 a fortnight above the minimum repayment.
Result: save over $29,000 in interest costs and pay off your mortgage 2 years and 4 months early.
Get A Lower Interest Rate But Keep Your Payments The Same As Before
When youre shopping around for the best mortgage lender or renewing an existing one, you obviously want to get the best rate you can. This will reduce the amount of interest you will pay over the life of the mortgage. But note that this strategy alone will not help you pay off your mortgage sooner unless you also set your payments at the higher rate.
To show how this works, lets look at an example.
Say you were considering a five-year closed fixed mortgage with a large national bank at a rate of 5%. Your monthly payment at 5% interest would be $1,744.81, and youd pay $223,444.49 in interest over the life of the mortgage . However, lets say you were approved for a better rate at 2.94% with an online mortgage lender. Your monthly payment at 2.94% would be $1,410.52 and you would save a bundle in interest more than $100,000 over the 25-year amortization.
But now assume that you set your payment according to what it would be at the higher rate even though your lender is only charging you 2.94% interest. In effect, that 2.06% difference in interest is going directly toward paying off your principal every month. Your amortization would decrease to 18.6 years, and youd pay a total of only $89,169.79 in interest, or a savings of $134,274.70.
|Calculation summary for $300,000 mortgage|
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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.
Take Advantage Of Prepayment Privileges
Pay off your home quicker with mortgages that have prepayment privileges. Lenders offer open, closed and convertible mortgages Opens a popup.. Open mortgages usually have higher interest rates than closed mortgages, but they’re more flexible because you can prepay open mortgages, in part or in full, without a prepayment charge. Closed and convertible mortgages often let you make a 10% to 20% prepayment. Your loan agreement explains when you can make a prepayment, so get the details from your lender beforehand. Also, decide which privileges you want before finalizing your mortgage.
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How To Pay Off A 30
A few options exist as realistic ways to pay off a mortgage sooner than the 30-year term.
Options to pay off your mortgage faster include:
- Adding a set amount each month to the payment
- Making one extra monthly payment each year
- Changing the loan from 30 years to 15 years
- Making the loan a bi-weekly loan, meaning payments are made every two weeks instead of monthly.
There are advantages to each approach. The choice comes down to careful study and a decision based on your financial position and the benefits of paying off a mortgage early.
Find The Best Interest Rate
Interest rates determine how much you spend on interest in addition to the principal. Generally, the higher the rate, the more you pay over the length of your mortgage. So, its important to choose a mortgage with a rate that fits into your repayment plan.
Mortgages come in 2 interest rate categories:
- Fixed-rate mortgages lock your rate for an entire term. This makes it easy to track how much principal you pay back each month
- Interest rates on variable-rate mortgages can change at any time your rate could be higher or lower, depending on the market. But lower interest rates mean you pay more on the principal and pay off your mortgage faster
Interest rates vary on different mortgages, depending on their features. For example, you pay a higher interest rate on mortgages with cash-back benefits. With a cash-back mortgage, in addition to the mortgage principal you get a percentage of the mortgage amount in cash. You can use this money to buy investments, pay for a special event or renovate your home. But cash-back mortgages aren’t available at all financial institutions.
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Change Your Payment Schedule From Monthly To Biweekly
Making biweekly, instead of monthly, payments is a way to pay down your mortgage faster without having to make a big payment. Its simple math: A monthly payment schedule is 12 months of payments per year. A year has 52 weeks, so a bi-weekly schedule would be 26 payments per year. Thats one extra payment a year.
Lets assume you have a $200,000 mortgage with a 30-year term and a 4% interest rate. Your monthly payment would be about $955, resulting in $11,460 paid toward your mortgage over the course of a year. A bi-weekly payment of $477.50 may seem like the same thing , but multiplied by 26, thats $12,415 toward your mortgage . That extra payment goes purely toward the principal meaning youll pay off the loan four years faster and save $22,366 in interest.
Many lenders will allow you to make the switch, but some dont offer the option and some charge fees, which isnt worth it, says Ilyce Glink, CEO of Best Money Moves and author of 100 Questions Every First-Time Home Buyer Should Ask. Every month, you can do the same thing by taking the cost of one or two extra payments, divide by 12, and add that amount to your monthly mortgage payments, Glink says.
What Is A Mortgage
In order to buy a home in Canada, youll need a down payment of at least five per cent of the homes purchase price . These funds are typically saved over time and can be boosted with the help of programs such as the first-time Home Buyers Plan and the new First Time Home Buyer Incentive, administered by the federal government. The remaining amount owing on the home is borrowed in the form of a mortgage loan. This loan is amortized over a number of years with mortgage terms and an interest rate that are renegotiated after a given period of time . The total amount borrowed is divided up as monthly or bi-weekly payments over the amortization period.
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Make Lump Sum Payments
Making additional lump sum payments in the early years of your home loan will also reduce your loan term.
You can make lump sum repayments if youve received a , inheritance, bonus or .
For example, you get an inheritance of $40,000 and decide to make a lump sum payment on your mortgage of $300,000. The payment will go directly towards paying off the principal amount of your loan, reducing it to $260,000 . This can effectively reduce your loan term by a few months or years.
Will You Be Charged For Overpaying Your Mortgage
Check your mortgage deal to get an accurate picture of how charges can cut into any savings that result from overpaying your mortgage.
You could be charged for paying your mortgage off early or making a monthly payment, which goes over your agreed monthly limit.
Many lenders will let you overpay up to 10% a year without penalties.
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Use An Offset Account
For borrowers that want to make extra repayments without all of their money going directly towards paying off their loan, an offset account might be the way to go.
An offset account is an account linked to your home loan. The funds that you deposit into an offset account are offset against the loan, meaning youre only charged interest on the difference between your loan balance and offset account balance.
To give you an example of how this would work, lets say you have a home loan balance of $500,000. If you have $50,000 sitting in an offset account attached to your home loan, you will only be charged interest on the difference, which is $450,000. The more money sitting in your offset account, the less interest youre charged.
This can be a good option if you would still like easy access to the funds if you ever need it on a rainy day. It can double as a savings account and be a way to reduce your mortgage length and interest charges. Make sure to try and opt for a 100% offset account – sometimes offset accounts wont offset the total amount deposited, so its a good idea to check with your lender.
Techniques To Pay Off Your Mortgage Faster
by Christy Bieber | Aug. 5, 2021
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Some of these approaches can make paying extra seem effortless.
Paying off your mortgage early can save you money on interest over time. It will also allow you to eliminate a big monthly payment, giving you a lot more freedom once you’ve gotten rid of that expense.
It can be a challenge, though, especially since a mortgage is a big debt. But there are a few approaches you could take to bring your mortgage loan balance down to $0 faster. Here are three of them.
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When To Pay Off Your Mortgage On Time
Its not always a good idea to put extra money toward your mortgage. Ask yourself these questions to figure out if you should pay your mortgage on time instead of early:
- Do I have other debts to pay off? Credit cards and loans typically have higher interest rates than mortgages, so they accrue interest faster. Youll save more money if you pay down high-interest debts first.
- Do I have other financial obligations to consider? Contributing money to your retirement account and emergency savings account are important financial goals. If these financial goals are lacking, consider funding these before putting extra money toward your mortgage.
- Do I have other big expenses coming up? If you need to save up for something big, like your childs college tuition or a new car, then you might want to focus on these goals before paying down your mortgage.
- Does my lender charge a prepayment penalty? If youre not sure whether your mortgage comes with this fee, call the lender and ask. Youll need to calculate the penalty and figure out if you still come out ahead.
Paying Off Your Mortgage Early: Pros And Cons
Although it is often a wise decision to pay off your mortgage early, there are a few situations where it might make sense to do something else with your extra cash. If youre thinking about reducing your mortgage, there are a few things to keep in mind.
Paying off your mortgage early requires a huge amount of money and this will divert funds from other areas of your finances. Before you commit all of your capital, think about whether you have any expensive debt to prioritise paying off ahead of paying off your mortgage quickly.
Equally, if you dont have a pension scheme, consider whether to start a pension pot and contribute here, as pensions offer a tax-efficient way to save for retirement and the earlier you start contributing to a pension, the more time you have for your retirement fund to build.
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Own Your Home Outright
Paying off your mortgage early can provide you with a sense of security. Should your financial circumstances change in the future, you wont have to worry about foreclosure as long as the taxes are paid because youll already own your home outright. Furthermore, youll have equity in your home that you can use to borrow funds for other potential needs, such as making improvements or repairs.