Thousands of homeowners in the United States with 25-30 year mortgages may think it’s impossible or challenging to clear the debt within a shorter time. The truth is, there are numerous methods and strategies that can help you pay off your mortgage faster and even easier.
If you have been looking forward to discovering how to pay off mortgage faster, you won’t have to look any further no more.
This post has compiled a detailed piece of information that will give you enough insight into how to pay off your mortgage early and have peace of mind.
People may spend three decades paying off their mortgages, but that’s because they are oblivious to the simple strategies that can enable them to pay off the debt faster.
Thankfully, with the actionable steps outlined in this post, you would better understand the most brilliant way to pay off your mortgage without going bankrupt.
How Does Paying Off A Mortgage Early Work?
Paying off a mortgage early becomes possible the moment you find ways to make extra mortgage payments as you go. By making these extra payments, you are simply speeding up the duration of paying off the mortgage. Hence, you’d pay off the debt early.
Nonetheless, not everyone can make extra payments because their cash flow is not sufficient. There’s no need to worry if you are in this situation because you will discover other brilliant ways to pay off this debt.
Should You Pay Off Your Mortgage Early?
Paying off your mortgage early is perhaps one of the most intelligent financial decisions you can make throughout your lifetime. You shouldn’t live your entire life worrying about paying off debt, which would affect you financially and otherwise.
By paying off your mortgage in time, you would be able to free yourself from debt and focus on other important financial goals.
Is It Worth It To Pay Off Mortgage Early?
It’s a very wise decision to pay off your mortgage early. Completing your payment early would allow you to have extra cash at the end of the month. Instead of spending a good percentage of your income paying off the mortgage, you can use that money to invest in a profitable venture and boost your finances as soon as you finish paying off the debt.
In a nutshell, paying off mortgage early is worth it. Once you successfully complete the payment, you will be relaxed and focused on other important aspects of your life.
Questions To Ask Before Paying Off Your Mortgage Early
To ensure you are making the best financial decision by paying off mortgage early, there are some questions you need to ask yourself and ponder on. This would help you think critically and determine if it’s right to pay off the debt early.
As someone who wants to learn how to pay off mortgage faster, here are some vital questions that will help guide your decision:
- For How Long Do You Intend To Reside In The Home?
If you plan to stay in the home for a couple of years and then sell it afterward, paying off your mortgage early might not be the best decision. You may want to invest your dollars somewhere else and extend your mortgage repayment duration.
- How Much Extra Money Do You Have?
One key factor that makes it possible for you to pay off your mortgage faster is your level of cash flow. You need to ask yourself how much extra money you would have left each time you make a payment for the mortgage. Remember your payment plan has to be flexible so that you don’t get stuck.
- What Mortgage Interest Rate Would Be Offered To You?
As of today, the average mortgage interests are usually low. Nevertheless, your interest rates would be determined by your credit score, debt-to-income ratio, and other personal financial information. If you don’t qualify for a reasonably lower rate, paying off early won’t make much sense.
- Do You Have An Emergency Fund?
Before spending more money to pay off your mortgage early, you need to create an emergency fund and save up a significant amount of money there.
Tips To Help You Pay Off Mortgage Early
By knowing how to pay off mortgage faster, you can own your home without thinking about any debt. Besides, your money can be used for other essential purposes once you successfully complete your mortgage payments.
Here are some brilliant ways to pay off mortgage early:
1. Refinance To A Shorter-Term
Usually, people get the 30-year home loan, and that’s the most popular mortgage offer. But sometimes, lenders may decide to offer shorter loan terms. A 15-year loan is a common shorter alternative that many lenders offer intending homeowners, especially in the United States.
Now, here is what you need to understand about shorter mortgage repayments. Shorter repayment periods means that you would have to pay more money monthly. However, the interest rate over the life of the loan would be reduced significantly.
This is why it’s advised to refinance for a shorter term, especially when your cash flow is enough to handle the payment.
Remember that a shorter term means you would be paying more money monthly. But as soon as you finish your payments, you would have saved thousands of dollars on interest. This is why it’s considered one of the best ways to pay off mortgage faster.
Nevertheless, you must know that not everyone can be eligible for refinancing. Sometimes, some people can’t be offered a shorter term to pay off their mortgages because they don’t have the financial capacity to do that.
By putting this into consideration, make sure your finance is stable enough to handle a shorter term. Otherwise, you would be considered ineligible for refinancing your mortgage payment plan.
2. Make Extra Principal Payment
Another brilliant way to make sure your mortgage payments are completed in time is to pay extra amounts whenever it’s convenient.
Most mortgage loans issued these days do not charge prepayment penalties, making it possible and easy for you to pay extra money toward your mortgage balance each month. On the other hand, you can decide to make a more significant lump sum payment on your principal every year.
Many people who don’t know how to pay off mortgage faster are oblivious to this strategy. Hence, their mortgage payments linger for a long time.
Aside from saving on interest, there are other benefits that come from making extra payments toward your mortgage. For example, the money you save on interest doesn’t have to remain in your savings account, and you can put it in an investment account and get a good return after an agreed time.
3. Make One Extra Mortgage Payment Per Year
As a way of paying off mortgage faster, many homeowners decide to make one extra payment per year. One of the simplest ways to do this is to pay half your mortgage payment weekly rather than paying the full amount at the end of each month. This mortgage payment method is known as “bi-weekly payments.”
By making bi-weekly payments instead of doing it monthly, you will easily add an extra payment once a year.
However, it’s not possible to make payments every two weeks straight away. You would have to talk to your loan servicer to make arrangements for this plan. Otherwise, your loan servicer would be confused about the partial and irregular payments.
Alternatively, you can make a 13th payment at the end of the year instead of 12 payments. The only downside to this method is that it requires you to come up with a lump sum of cash. This is why some homeowners make this extra payment using their tax return or yearly bonus at work.
Take A Look At This Example:
Let’s say you take a mortgage for $200,000 on a 30-year repayment term at 4.5%; you would have to pay $1,000 monthly as principal interest payment. By making an extra $1,000 once a year, you will save 4½ years off the 30-year mortgage payments term.
If you don’t know how to pay off your mortgage faster, this is one repayment method you should consider.
4. Recast Your Mortgage Other Than Refinancing
Instead of refinancing, another method that helps you pay off your mortgage faster is known as mortgage recasting. This simple repayment strategy entails paying a lump sum toward the principal while the bank adjusts your payoff schedule to reflect the new balance. This will help you pay faster.
One of the main benefits of recasting Is that the fees are very low, unlike refinancing. Mortgage recasting fees are usually a few hundred dollars. But if you are refinancing, the cost would amount to a few thousand dollars.
Moreover, if you have been offered a low-interest rate initially, you would still be able to keep it while you recast your mortgage. But if you have a high-interest rate, refinancing might be the ideal strategy to pay off the mortgage quickly.
You must know that not all companies will allow you to recast your mortgage. Make sure you discuss with your lender or servicer to see if you have the mortgage recasting option.
Nevertheless, this is a method you should consider as someone trying to discover how to pay off mortgage faster.
5. Reduce Your Balance (Consider Using A Lump-Sum Payment)
If you don’t consider recasting as one of the ways to pay off mortgage early, an alternative option is to make lump-sum payments to your principal payment whenever it’s convenient for you.
If your cash flow is not large enough to allow lump-sum payments, you should avoid this method. But in a situation where you can generate extra income, you can occasionally reduce your balance with lump-sum payments.
Sometimes, people are opportune to inherit money, earn commission or bonuses at work, or sell a property. The proceeds realized from these events can be used to pay off the mortgage faster through lump-sum payments.
One good thing about lump sum payment is that you can use it instead of recasting, saving yourself some money. By using this strategy appropriately, you already know how to pay off your mortgage faster.
Pros And Cons Of Paying Off Mortgage Early
Paying off mortgage faster has its merits and demerits. Before you learn how to pay off this debt faster, you must understand why it’s a good decision and why it might not be a good decision for you in particular.
Here are the pros and cons of knowing how to pay off mortgage faster:
- Saves Money On Interest
As you make payments for your mortgage, a certain amount of money goes toward interest. It means that the fewer monthly payments you make, the less you will pay in interest. Remember you need to pay your interests quickly as well. You could save thousands of dollars by paying early.
- Monthly Payments Come To An End
Once you complete your mortgage payments, you won’t have to bother paying any monthly fees for the rest of your life. You would be able to free up cash for other vital purposes.
- You Own The Home Outright
Once you finish making your payments in time, you completely own the home. There’s no more chance of losing the house because your debt has been paid off in full.
- Peace Of Mind
You probably don’t like sleeping while thinking of the debt you have to pay, and no one wants that mental stress. For your peace of mind, it’s advisable to pay off your mortgage faster.
- Inability To Invest
While paying off mortgage faster, it would be challenging to free up cash for investment opportunities since you are trying to meet up with a quick payment plan. But if you slow down your payments and invest in the stock market for a couple of years, you will have a decent return on investment.
- Credit Score Gets Affected
There are a couple of things that make up your credit score. One of them is your mix of credit types. For instance, if you own a credit card, a mortgage, and a car loan, taking away one type of credit will cause your credit score to decrease somewhat. This is something to consider.
- No Mortgage Interest Tax Reduction
Every homeowner in America can claim the amount paid in mortgage interest on his taxes, thereby lowering taxable income. But once you pay off your mortgage early, you will lose this benefit.
Final Thoughts On Paying Off Mortgage Early
Your reason for wanting to pay off your mortgage early is very important. You shouldn’t decide to pay off your mortgage faster just because it seems right, and that’s what many Americans are doing. You should pay off your mortgage early because it’s a part of your plan to improve your finances, focus on other goals that matter, and then stay fulfilled.
Since this post has shown you how to pay off your mortgage faster, there’s no need to waste more time. Choose the convenient repayment strategy, and speak to your loan servicer if you have to.
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