If you’re a homeowner, there’s one thing that won’t change: your obligation to make a monthly mortgage payment. The good news? A loan term doesn’t have to dictate when you free yourself from this financial commitment. Here, Trulia gives 5 tried-and-true ways to pay off and cut the ties early while lowering the total amount paid in the process.
1. Refinance into a 15-year mortgage
Cutting your loan term in half is a big financial step, but the benefits are substantial. Not only will you shorten the pay off time, but you’ll also be rewarded with a lower rate and pay significantly less in interest during the life of the loan. The key is to determine whether you can shoulder a larger monthly cost that comes with a 15-year mortgage. If you’re not completely confident when it comes to committing to a higher monthly payment, challenge yourself to make the same payments you would be making if you had locked into a 15-year mortgage. Then, if financial circumstances change, you still have the flexibility to return to a lower monthly payment.
2. Refinance into a lower rate while keeping payments the same
There are two benefits of refinancing your loan while sticking to the same payments: You will pay less in interest during the life of the loan and reach mortgage freedom sooner. However, it’s important to do some research on how to refinance. Closing costs for refinancing typically are lower than if you were to purchase a new home, but they’re still an added expense. Your new interest rate should be low enough to negate the cost of refinancing, or you should be planning on staying put long enough to reap the benefits of a smaller rate.
3. Pay off private mortgage insurance (PMI)
If you financed more than 80 percent of your conventional mortgage, then you likely are paying private mortgage insurance to protect the lender in case of default. Redirecting this amount—usually 0.05 percent to 1 percent of the loan amount annually—to the principal on your mortgage can have a big impact over time. You can request to get rid of PMI once you reach an 80 percent loan-to-value ratio, but the lender is required to remove it after you’ve reached a 78 percent loan-to-value ratio. Speed up the process by increasing your equity through home upgrades, or if the home already has increased in value for other reasons, opt to refinance. Some lenders may even allow you to get an appraisal to show the new value and your increased equity without paying for a refinance.
4. Put “found” money to work
If your monthly budget doesn’t have wiggle room and paying the costs to refinance isn’t feasible, there’s another option. Tax returns, bonus checks and inheritance payments present the opportunity to pay off a chunk of your mortgage without it affecting your monthly budget. This could mean thousands of additional dollars chipping away at this massive financial responsibility each year. Sometimes your money could be better spent elsewhere—such as paying off high-interest debt—but if wiping out your mortgage early is a priority, this is a great place to start.
5. Pay a little extra each month
Additional small principal payments add up over time. On a $150,000 loan for 30 years at 3.75 percent, with no additional payments, more than $100,000 will be paid in interest during the course of the loan. By adding $100 per month in principal payments, the total interest paid is reduced by almost $25,000 and the loan will be paid off more than six years sooner.Another way to do this is by making biweekly mortgage payments. Instead of making 12 monthly payments, this equals out to 26 half-payments—or 13 full payments—per year.