A mortgage is one of the largest payments homeowners have to make each month. It can be beneficial to pay off a loan quickly. Paying it off sooner may reduce the amount of interest paid on the loan significantly. However, many people do not know how to pay off the mortgage faster simply because these loans tend to have fixed monthly payments. However, there are a few key ways to pay down the mortgage and, in doing so, save money.
Why Paying Off a Mortgage Quickly Matters
The sooner a loan is paid off, the less time there is for the loan’s interest to build. Many people have 30-year mortgages, but paying it off within 20 or 25 years can help to significantly reduce the amount of time interest is applied to the loan.Most loans can be paid off early. However, some types of mortgages may have stipulations or fees associated with paying off the loan before its expected pay off date. Some loans also have early payoff fees if the loan is paid in full within a short period of time such as within the first five years. Keeping this in mind, homeowners may wish to consider a few ways to pay off their mortgage faster.
Pay More Each Month
A simple way to reduce the amount of time it takes to pay off a loan is to pay more each month than required. When paying down mortgage value like this, there are a few things to learn. First, realize paying off the mortgage sooner like this allows a homeowner to avoid the cost of refinancing a loan to a shorter term.
For example, divide the total amount paid each month (including both principal and interest) by 12. Add this amount to the mortgage payment made each month. Doing this allows the borrower to make the equivalent to an extra month’s payment throughout the year. It may not seem like much initially, but doing this consistently allows for the loan’s value to fall faster.
Pay Every Two Weeks
Most loans require monthly payments. This means homeowners make 12 payments per year. However, there are 52 weeks in the year. By paying half of what is owed every two weeks, it is possible to make the equivalent of 13 payments per year. Again, this amounts to an extra whole monthly payment made each year, reducing what is owed. Do this over the life of the loan can shave years off the loan’s repayment.
To ensure this works well, work to pay down mortgage principle rather than interest. Ensure the lender is applying any extra payments made to the principle. When the principle (or the amount borrowed) is paid down first, it reduces the amount owed and reduces the interest charged to the account.
Refinance to a Shorter Loan Term
Paying down mortgage value fast like in the above example works well, but for some people, it can be hard to stick to these terms. This is when refinancing can be a better option. Refinancing a current mortgage loan into a new mortgage loan with a shorter term can offer several benefits. If interest rates are currently lower than what the homeowner’s mortgage rate is, there are cost savings possible.
For example, obtaining a new loan with a lower interest rate for a shorter period of time can help to reduce the total amount paid on the loan by thousands of dollars over its lifetime. It is common for homeowners to have a 30-year loan. Refinancing to a 15-year loan can offer these types of significant savings. These loans may require the same or higher monthly payments to achieve these goals, depending on interest rates, fees, and closing costs associated with the loan.
Apply Extra Money to Mortgage Principle
Throughout the lifetime of the loan, make it a priority to pay extra money towards the principle of the loan. For example, families can benefit by putting their tax refund towards their mortgage balance. Funds from investment accounts, payments from the sale of property, and even bonuses can be applied directly to the principle of the loan. The more money put towards the principal, the shorter the time frame is.
Individuals may wish to take steps to aggressively pay off their mortgage early. Taking on an extra job, selling items, and even reducing overall expenses can help the homeowner to have more available income to put towards their mortgage debt. And, once the debt is paid off, it can all be well worth the investment. Because paying off a mortgage loan like this can save thousands of dollars, it is something many people will benefit from even if they can only make smaller amounts of extra payments on their debts. Doing so consistently allows for the balance to fall reliably.
