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.
Commit To Make An Extra Loan Payment Each Quarter
If your budget is too tight to round up each mortgage payment or to pretend that you refinanced and pay a considerably higher amount each time, commit to making an extra payment each quarter.
That means that you should save a little each week so that at the end of every three months , you can make an extra payment. So, in each quarter, you have approximately 12 weeks to find enough money either in your existing budget or through a side hustle to make an additional house payment.
How Much Extra Should You Pay To Payoff Your Mortgage Early
You dream of paying off your mortgage early.
You long for the day when you are debt free.
But how do you do it?
How much must you pay each month to be out of debt by a certain date?
What if you wanted to pay off your mortgage in 15 years instead of 30? How much would you save?
The good news is this mortgage payoff calculator makes figuring out your required extra payment easy.
You choose how quickly you’d like to pay off your mortgage, and the calculator will tell you the required extra monthly payment to get it done. It will also tell you how much interest you’ll save!
However, before you start making your extra payments, there are a few factors you’ll want to consider first . . . .
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You Want The Freedom To Explore New Opportunities
When youre making payments on a home, it limits your ability to explore career opportunities. Giving up a dependable, steady job to try a new profession or to return to school can be a risky venture.
If you can pay off a home loan early, youll have fewer financial obligations and more freedom to pursue dreams. These might include starting a business or embarking on a new career.
Once your loan is paid off, your monthly expenses will drop and your home will become a financial asset you can draw on.
Early Mortgage Payoff Calculator
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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.
Get A Home Mortgage That Fits Your Budget
One of the biggest mistakes people make when choosing a mortgage is to focus on finding the lowest monthly payment. But the real key to building wealth long term is to focus on the total cost. Heres a clue: We suggest a 15-year fixed-rate conventional loan. And heres another handy guideyoull know you can afford a mortgage if the monthly payments are no more than 25% of your monthly take-home pay.
If youre looking to pay off your mortgage faster, consider refinancing. The right deal could save you a ton of interest and help you pay it off way sooner.
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
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Pay Mortgage Early Or Invest: What Does The Math Say
You probably dream of the day when you no longer have a mortgage payment hanging over your head. Being debt free is an admirable goal, but it might not make the most sense financially. Especially now, with mortgage rates so low, its cheap to hold debt. That leaves the opportunity to grow your wealth more through other investments.
Lets take a look at an example. Say you have a 30-year mortgage of $200,000 with a fixed rate of 4.5%. Your monthly payments would be $1,013 , according to our mortgage calculator, and youd spend a total of $164,813 in interest over the life of the loan.
Now lets say that youre able to come up with an extra $300 per month to put toward your mortgage. Youd shave off 11 years and one month from your repayment period, plus save $67,816 in interest.
On the other hand, you could take that $300 per month and invest it in an index fund that tracks the S& P 500 Index instead. Historically, the S& P 500 has returned an average of 10% to 11% annually since its inception in 1926 through 2018. If you want to be extra conservative, however, we can assume an average annual return of 8% on your investment.
At the end of 19 years , you would have $160,780. Thats more than double your potential interest savings. In fact, after that length of time, youd have about $105,487 left on your mortgage. If you decided to pay your mortgage early after all, you could use your investment funds and still have $55,293 left over.
You Want To Free Up Monthly Income For Retirement
A home loan typically is the largest single financial obligation people face. Many homeowners strive to pay off their mortgage before reaching retirement age. That way, they can reduce monthly expenses before they quit their jobs and begin living on fixed incomes.
Paying off a 30-year mortgage before retirement can be a challenge. The reward is that youll have more disposable income in old age.
If you cant quite pay off the mortgage at this moment, at least consider getting a home loan with a lower rate. Stop by our Solutions Center to compare your mortgage refinance options.
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Want To Pay Off Your Mortgage Faster Than 30 Years
Many homeowners with 30-year mortgages feel like theyllnever be without the burden of debt.
Fortunately, there are several good waysto pay off your mortgage faster and save big on interest payments.
Even better, not all methods require spending a lot of extra money.
But consider your options carefully. If you have extra cash to spend on your mortgage, it may generate more value elsewhere.
Heres what you should know.
Paying Off Your Mortgage Early: Pros And Cons
Mortgage pay off can help save on interest but you may be missing some benefits.
A mortgage will likely be your biggest, lengthiest investment. And if you’re like many homeowners, you have a 30-year mortgage and seemingly never-ending monthly payments.
Whether it’s three decades or a 20-year or 15-year mortgage, this debt doesn’t go away easily and it constantly weighs on you when you plot out your financial goals. This has some borrowers dreaming about how to pay off their mortgage early to eliminate that bill. A mortgage payoff is not an insurmountable task. It can be done with proper planning.
The first thing you should do is explore your home loan options by visiting sites like Credible. Learn more about refinancing with different mortgage lenders and save money long-term.
If you’re already ready to pay off your mortgage early and you don’t need any help doing so, then you should read on to learn about the positives and negatives of this option.
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Make A Mortgage Payment Every Two Weeks
Most people pay their mortgage bills once a month. However, a strategy that allows you to apply more money towards the principal each month, save on the interest that accrues and lessen the term of your mortgage loan is to make biweekly payments that are half the size of your monthly mortgage.
Suppose your mortgage is $1000 per month. With biweekly payments, you would pay $500 every two weeks. What difference does it make to make a half-payment every two weeks rather than one large one every month? By paying once a month, you make 12 payments a year. By splitting it up every two weeks, you make 13 payments a year.
That often reduces your loan by approximately five years.
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.
Live Off Less Than You Make
The biggest personal finance challenges that we face tend to be attitudes characterized by two acronyms: YOLO and FOMO . YOLO, or You Only Live Once, allows us to permit ourselves to be a little reckless with our finances. Do you want to buy that Porsche? Well, go for it! You only live once!
FOMO, the Fear of Missing Out is similar. All your friends are going on a cruise for your besties 50th birthday? Well, you HAVE to go you dont want to miss out!
Unfortunately, although these feelings are human nature, they certainly do not help our financial situation. We may think that we work hard, and we deserve to spend all the money that we have left after the bills are paid.
However, if your goal is to pay off your mortgage in five years, you may need to make some choices that allow you to live off less than you earn. WAY less than you make for a short amount of time. The best-case scenario is to live on 50% of what you bring home. Then you could use the other 50% for the extra principal.
You could either be super broke for a short amount of time to pay off your mortgage, or you could just be plain broke for the rest of your life. It certainly wont be painless, but you can live off much less than you think.
Recap Of Ways To Pay Off Your Mortgage Faster
If you decide you want to pay off your mortgage early, ask your mortgage lender about:
Whatever you choose, make sure youve weighed all your options to find the best use for your hard-earned cash.
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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.
Drawbacks Of Paying Off Your Mortgage Early
by Maurie Backman | Published on Sept. 25, 2021
Many or all of the products here are from our partners. We may earn a commission from offers on this page. Its how we make money. But our editorial integrity ensures our experts opinions arent influenced by compensation. Terms may apply to offers listed on this page.
Before you push yourself to pay off your home loan ahead of schedule, consider the downside of going this route.
When you get a mortgage, you agree to repay your loan over a certain period of time. That could be 15, 20, or 30 years — or a different term that your mortgage lender agrees to. But you may, at some point, decide that you want to pay off your home loan early. Doing so could save you a lot of money on interest. Despite that benefit, here are a few reasons you may not want to pay off your home ahead of schedule.
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Make Larger Payments More Frequently
Making extra payments toward your mortgage can help pay it off faster. While some people choose to make additional payments on a consistent basis, others do so whenever they come across some extra cash. The specific way that you choose to make extra mortgage payments should be based on whats most manageable for your budget.
Just make sure that if you make extra payments, you tell your lender that you want the money to go toward lowering your mortgage principal. If you fail to make this clear, your lender could instead use the additional funds to pay off the interest.
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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