If you're paying off a mortgage, then odds are it's probably your biggest monthly payment. There are several ways that you can actually lower your monthly mortgage payments, thereby giving you some additional financial flexibility every month. Additionally, you can work to pay off the debt faster.
There are two ways to own your home. Either you can pay cash upfront or you can pay little by little, year after year. For most us, monthly mortgage payments are the most feasible option. While we continue to chip away paying off our homes, some of us may wonder how we can speed up the process. Whatever your reason may be to reduce debt faster, there are a few simple strategies you can easily put in place now to help you pay off your mortgage early.
Why Pay Off Your Mortgage Early?
When you pay off your home loan faster, you end up paying less for your home than if you were to pay the minimum required payment for the term of the loan. Paying off your house early will save you thousands, tens of thousands of dollars and possibly more, over time. How? Let’s do the math with the following hypothetical example.
Let’s say you get a $300,000 home loan based on a 30-year term and at a fixed annual percentage rate (APR) of 4.46% (current APR as of 10/1/2018). If you were to pay the minimum, your monthly mortgage payment would be $1,512.93 every month for 30 years. However, by the time you pay your house off, you would not have paid $300,000 for your home but significantly more, in fact, nearly double because of the cost of interest.
Home Loan: $300,00
APR: 4.46% (fixed)
Term: 30 years
Interest Paid: $244,656.29
Total Paid: $544,656.29*
* For simplicity of calculations, we did not include insurance, PMI, property taxes, or any closing costs associated with buying a house.
In this example, the amount paid in interest is nearly equal to the original home loan. With such a sizeable interest payment, it’s easy to understand why paying off your mortgage sooner is so appealing. But what can you do? Before you start buying lottery tickets or cashing in your coin jar, here are some simple tricks you can use to knock years off your mortgage while saving money in the process.
Set up Bi-weekly Mortgage Payments
This strategy could reduce a 30-year mortgage to 25 years and save you tens of thousands of dollars in the process, according to real estate brokerage Redfin. Essentially, you will take your monthly mortgage payment (including taxes and insurance), divide that in half, and then make a payment every two weeks rather than once a month. In effect, this strategy will have you make the equivalent of 13 monthly payments per calendar year instead of 12. The result is significant as you can see below.
If we were to use our $300,000 mortgage example from above and apply a biweekly payment of $765.47 (which is half the original mortgage payment) instead of the full monthly payment of $1,512.93, this would be the result.
Home Loan: $300,00APR: 4.46% (fixed)Term: 25 yearsInterest Paid: $201,820.63Total Paid: $501,820.63
Not only do you reduce your mortgage by 5 years but you also end up saving $42,835.37 in the process. Before you implement this strategy, check with your lender to see if they accept bi-weekly payments without charging a fee. If they do charge a fee, this may not be the best tactic to use to reduce your mortgage and you should possibly look to one of our other recommended strategies.
Refinance Your Mortgage
This strategy is highly relative to your situation. If you currently have a high-interest rate but have been in your home for a few years and have built up some equity, refinancing your mortgage may be a good solution before interest rates go up. Even a 1% decrease in your APR can save a considerable sum of money in the long run. Alternatively, if you feel financially capable to handle a larger mortgage payment, a 15-year mortgage over a 30-year could save you tens of thousands of dollars. Again, using our hypothetical example from above with a higher monthly mortgage payment of $2,289, we get these results.
Home Loan: $300,00APR: 4.46% (fixed)Term: 15 yearsInterest Paid: $111,993Total Paid: $411,993
Typically, with a 15-year home loan you’re rewarded with a lower APR than a 30-year term; however, even with keeping the APR the same at 4.46% we can still see a substantial difference in total interest paid. Not only would you pay $132,663 less in interest you would have also effectively eliminated 15 years of paying on a mortgage!
A Little Extra Goes a Long Way
You may think that little amounts don’t count for much in the larger picture of a 30-year home loan; such as the money you spend on your morning cup of coffee. However, what if you could shave off years from your home loan by skipping your coffee and instead put that money toward your mortgage? Even one hundred extra dollars each month could save you thousands of dollars in interest payments.
For example, let’s say you don’t buy your morning cup of coffee and instead applied that five dollars toward your mortgage. In this situation, we estimate a morning cup of coffee is five dollars- once you add your coconut milk, splash of vanilla, and leave a tip, it adds up! At five dollars a day, we are looking at an additional $100 month that could be going toward your mortgage. Back to our original example of a $300,000 home loan, we will add an additional $100 a month against your mortgage.
Home Loan: $300,00APR: 4.46% (fixed)Term: 26 years, 5 monthsInterest Paid: $211,016Total Paid: $511,016
In this scenario, we have not only effectively knocked off a few years of your mortgage payments, but also reduced your interest by $33,640. Don’t worry, we’re not taking away your coffee. The main takeaway is that a little extra cash towards your home loan can go a long way.
The main strategy for those wanting to pay off their mortgage early is to focus on reducing the overall principal of their home loan as fast as possible. Monetary windfalls are any form of extra money that comes your way and is technically unplanned for. This could include things like gifts, bonuses at work, cash from working overtime, inheritance, or tax refunds among others.
As we saw in the prior example that even paying an extra $100 a month, or $1,200 a year, you can reduce your mortgage payment by years. Just imagine how many years you could reduce your mortgage if you were to start putting a larger portion of your extra money against your home loan.
Speak to Your Lender
Make sure to speak with your mortgage lender about your financial situation and how you want to pay off your mortgage faster. You don’t want to begin a strategy to pay off your mortgage early only to find out that your lender has penalties for early payments. Some lenders may only allow extra payments to be made within a specific timeframe. Make it clear that when you apply an additional payment that it needs to go against the principal of your home loan and not towards any future mortgage payments.
Take Time to Build Your Strategy
Paying off your mortgage early is all about having the right strategy, tailored to you. Take your time to explore your options, get counsel from your lender and pursue the strategy that will pay off your mortgage the fastest.
Consider Your Options
If your debt has gotten too much for you to handle, then you might want to consider filing for Chapter 13 reorganization bankruptcy. Chapter 13 allows you to develop a debt repayment plan without the thread of foreclosure. If you would like more information, or have any questions on the process, contact us today for professional legal advice.
This is a guest post by Redfin's Jeff Anttila.