When you have a mortgage to pay off, it is a huge financial commitment for you. You have to plan around your other goals carefully so that you don’t overspend anywhere. Though your mortgage lasts for a long term, it makes sense to pay it off sooner, so that you can save a lot of money that you would have otherwise paid as interest charges.
Advantages of Paying Off a Mortgage Early
As we discussed in the above paragraph, one of the major advantages of paying off a mortgage earlier is that you can save a great deal of money that you would have paid as interest charges throughout the tenure of the mortgage.
Disadvantages of Paying Off a Mortgage Early
When you get an incentive and you want to set it aside for paying off your mortgage, you are sacrificing an opportunity to invest it in other investments that provide greater returns. Since you keep putting off all your savings and salary hikes to pay your mortgage, you may not have an emergency fund to meet unforeseen financial commitments. Some of the banks charge quite an exorbitant fee towards foreclosure charges, which you should be ready to take up.
Eight Strategies to Pay Off a Mortgage Early
1. Make Bi-Weekly Payments
One of the best and easiest ways to reduce the tenure of your loan and the interest rates is to make bi-weekly payments. This will help you make 13 payments in a quarter and 52 payments per year. When you make monthly payments, it will work up 4 weeks in a month and eventually 48 payments per year. By doing bi-weekly payments, you can close a 30-year loan in 27 years and it can reduce your interest rates by at least 10%.
2. Make an Extra Payment Each Year
If you are going to make monthly payments, ensure that you set aside a particular amount at the end of each year for the additional 13th payment of the year towards the principal amount of the mortgage. There are lots of American banks which allow you this flexibility. While making this additional payment, ensure that you tick on the option known as “apply to principal” in your documents. This will reduce your overall principal amount.
3. Add an Extra Amount Each Month
Once your bank has worked out the details of your monthly payment, the rate of interest and tenure, speak with the officials to allow you the provision of paying an extra amount every month. Any extra amount would do. It could be as low as $10 per month to as high as $1000 per month. As and when you get a salary hike at your workplace or if you get a cash award for a good job, ensure that you contact the bank right away and use this for paying off your mortgage.
4. Apply your Windfalls
Windfalls don’t come regularly, do they? Most of the times, you may get a payment towards tax refunds or may get an incentive at your workplace just when you expect it the least. You may suddenly have inherited a share of a property that you never knew existed! Never get overwhelmed with the sudden inflow. Ensure that you use up everything for paying off your mortgage. One month of sudden big payment can make an impact on your tenure and interest rates.
5. Round Up your Payments
This seems to be a simple suggestion, but it works wonders. If your monthly instalment works to say $420 every month, you can round it up to $450 or even $500 (if you can afford to) to see what difference it brings to your mortgage. More often than not, it is these small changes that make a big impact on the total principal amount of your mortgage.
6. Set a Target Payoff Date
Nothing works like willpower. Therefore, set a target for yourself (could be when your kids graduate, when you turn 50 or anything else) and work tirelessly towards achieving the same. Know how much you need to pay monthly if you want to close off the mortgage within the target you have in mind and keep paying as frequently as you can to achieve your target.
This is a risky step and you should do it only after careful research. If you want to refinance your mortgage for a lesser interest rate, you should do so only if the new rate is lesser than the rate that you are already paying. If you want to pay off your mortgage early by refinancing it for a shorter term, it means you should make higher monthly payments. When you refinance your 30-year mortgage into a 15-year refinancing option, you are locked in it eventually. You will not get the flexibility that you enjoyed with your mortgage earlier.
8. Get Rid of PMI
When you take a conventional home loan by paying less than 20% of the total value as down payment, lenders want to protect their interests and charge you a certain rate of PMI every month. PMI is private mortgage insurance and this is a cover which protects lenders when you default on your monthly payments. When the principal amount of your mortgage comes down to 80% of your home’s market value, you can get rid of PMI and avoid paying huge charges every month. Instead, you can apply the extra cash to your principal and reduce your interest payments.