By Laura Beck on May 28, 2024
For most Americans, their mortgage payment is their single biggest monthly expense.
Paying off that mortgage early can save you thousands of dollars in interest charges over the life of the loan. It also frees up a huge chunk of your monthly income for other financial goals once it’s finally paid off. However, making extra payments towards your principal balance is easier said than done for many households strapped for cash flow.
Follow these tips to kick your mortgage payoff plan into high gear while balancing your other financial priorities.
Make a Plan and Stick To It
In order to pay off your mortgage, you’ll need to take it seriously. And having a budget and a plan for repayment is the first step.
“Have a budget and stick to it; that way, you will be able to identify areas to save and, in turn, use the saved money in repaying your mortgage faster,” said Saddat Abid, CEO of Property Saviour. “Every little bit counts, and those little extra payments can really add up over time.”
Set up recurring automatic payments for your mortgage each month. Making it automatic ensures you don’t find other ways to spend that money each month.
Increase Payments Whenever Possible
Pay extra to your mortgage payment amount whenever you can. Perhaps you earn extra commissions, overtime or bonuses at certain times of the year you can put towards paying more on the mortgage those months.
“Apply any windfalls directly toward your mortgage: bonuses, tax refunds, or that inheritance money left to you,” Abid said. “Do not use the windfall, and by doing so, direct it towards paying your mortgage, and that can substantially reduce your debt. By making even a tiny additional amount on top of the regular payments you make, it rapidly reduces the principal over time, translating to reduced interest payments. This is easy but very effective, as it shortens the life of your mortgage.”
Even paying just one extra mortgage payment per year can shave years off a 30-year loan while saving thousands of dollars in interest charges over the life of the loan.
Consider Bi-Weekly Mortgage Payments
There’s a simple strategy to make the equivalent of one extra mortgage payment per year without drastically increasing what you pay monthly. Instead of making one payment per month, you make half of your normal monthly payment every two weeks. Since there are 52 weeks per year, making payments every two weeks results in 26 half-payments each year. This comes out to thirteen full monthly payments per year instead of twelve.
“Before year-end, you would have made an extra month’s payment, but you won’t feel it,”Abid said. “The result is likely to be a quicker pay-off time and huge savings in interest.”
That single extra payment per year may not seem like much, but it can shave years off a 30-year mortgage while saving tens of thousands in interest over the life of the loan.
Refinance Your Loan If You Can Get a Lower Interest Rate
If mortgage rates have fallen significantly since you first obtained your home loan, refinancing to a lower interest rate could translate into huge interest savings. Even a 1% difference in interest rate can equate to tens of thousands of dollars in savings and accelerate your timeline for paying off your loan.
“Reducing the rate may greatly reduce the monthly payment and the interest to be paid over the life of the loan,” Abid said. “Make sure, though, that you are factoring in closing costs here; you want to make sure that refinancing will actually save you money in the long run.”
Before you decide to refinance, factor in the costs of obtaining a new loan, such as lender fees, appraisal costs, and more. You’ll need to calculate at what point your monthly payment savings would outweigh the upfront costs of refinancing.
Refinance to a Shorter Loan Term
Lindsey Harn, an agent at Christie’s International Real Estate, recommended considering a 15 year fixed mortgage versus a 30 year fixed mortgage.
This is one of the most straightforward ways to pay off your mortgage faster. But be aware that your monthly payment will increase substantially to account for the accelerated payoff period. Be sure that you can realistically handle the higher payment before you refinance.
Make Principal-Only Payments
Your monthly mortgage payment goes towards both repaying loan principal as well as interest charges. In fact, the majority of your payment goes towards interest during the first ten to fifteen years of the loan. You build equity and pay down principal much slower.
“Making principal payments versus interest payments will help you pay it down faster,” Harn said.
To pay off your mortgage faster, make additional payments separate from your normal monthly payment, and specify that the extra payment amounts are to be applied solely to the principal loan balance. This will, in turn, decrease the amount of interest owed over the lifetime of the loan.
Recast Your Mortgage
If you happen to receive a big windfall, you may be able to recast your mortgage. With a recast, you make a large one-time lump sum payment towards your principal balance. Your lender re-amortizes the remaining balance over the original loan term to calculate a new lower monthly payment amount.
For example, if you originally borrowed $300,000 and have 25 years remaining but make a lump sum $50,000 principal payment, the new amortization would be based on a $250,000 balance paid over 25 years at the original interest rate. Going forward, your monthly payment amount will be lower, but the date at which your mortgage will be paid off stays the same.
However, Harn recommended acting as if your payment had not been lowered at all. Instead of paying the new lower monthly payment, she suggested continuing to pay your original monthly payment, just as you always did.
“Rather than lower your monthly, which the recast will do–continue paying the mortgage down at the higher payment rate,” Harn said.
If you use this strategy, you’ll end up paying off your mortgage more quickly.
Article originally published by GO Banking Rates.