Refinancing can help improve your financial picture, and real financial security comes from having a home with no mortgage. Do you dream of making the very last payment on your mortgage, as well as how you’re going to feel when you are mortgage-free, and what will do with all that extra money you’re going to have at the end of every month? Stop dreaming and make it a reality—years ahead of schedule.
Here, The Mortgage Reports explains how to go about paying off a mortgage faster.
Early payment penalties
First, check your mortgage documents or call your loan servicer. Some mortgage agreements impose prepayment penalties if you pay off your home loan early. Many don’t have any such requirement, and some impose only small fines. But some demand significant sums that can undermine the economic viability of early payments. Check your agreement to see which category you belong to.
It’s the economics!
Your decision to pay off a mortgage faster should be based on whether it makes economic sense for you. That means at least considering whether you’d be better off investing elsewhere the extra money you’ll expend in bigger mortgage payments. Just remember high rewards involve high risk. If you’re banking on high returns on your investments, those won’t be certain. Also, you’re definitely going to receive (as savings) the money you don’t have to pay out by having fewer mortgage payments. Work out the total costs of borrowing for your two models: leaving things as they are now and paying down your mortgage quicker. A mortgage refinance calculator can help you see if how much you’ll save by refinancing to a shorter term. The difficult part is in making the right assumptions about alternative investments.
Refinance to a shorter term
The most obvious way to pay off a mortgage faster is to refinance to a loan with a shorter term. So, if you have 20 or 25 years left to run on your 30-year mortgage, you could refinance to a 15-year one. Some lenders are very flexible about loan terms and you may be able to find one that covers the range from eight years to 30. One of these refinances may make sense even though mortgage rates have been rising recently. That’s because shorter-term loans come with lower interest rates than longer ones, and borrowing the same sum for a shorter period is going to cost you less because you sheer years off your repayment schedule. However, these loans come with higher monthly payments. So you need to be absolutely sure you can and will continue to be able to afford those.
Just pay more
Many lenders will allow you to increase the size of your regular mortgage payment or simply make extra payments when you can. However, you must talk to your lender first. Agree that your extra payments will be applied only to the principal (the amount of your original debt you still owe). Otherwise, there’s a risk your lender will assume they’re simply advance installments, which would mean some of the money will go on interest on a part of the debt you no longer owe. Even if things are tight, you may be able to round up your monthly payment so it ends in two zeros. Or perhaps you could use your tax rebate to make a 13th payment each year. Both those could shorten your loan appreciably and possibly save you thousands of dollars.
Pay every two weeks
This can be a relatively painless way of making the equivalent of 13 monthly payments a year. But, again, you must speak to your lender first. You make half of your monthly payment every two weeks. Because there are 52 weeks in a year, that means you’ll make 26 half-payments, which is the same as 13 full ones. If you carry on paying monthly, you’ll make only 12. This strategy can shave four to six years off of a typical 30-year loan, and on a 15-year mortgage, biweekly payments may cut one to three years from the repayment time, depending on the loan amount and interest rate.
Cash out to cash in
Just because you’re burdened with piles of high-interest debt, that doesn’t necessarily mean you can’t pay off a mortgage faster. One way forward is to consolidate all those expensive loans through a cash-out refinance. You’ll be free of all those payments on credit cards, personal loans and perhaps even auto loans. You can then use all that extra money to pay down your mortgage faster. There are obvious risks with this strategy. If you fail to address the bad habits that saw you build up all those debts, you’re likely to end up with similar ones again. But you’ll also have a higher mortgage balance and probably a longer loan. Don’t go down this road unless you first put in place a realistic household budget and promise to stick to it.
How should you pay off a mortgage faster?
The two refinance options above are the big-bang ways to shorten the time before you are mortgage-free, but they come with some risks. Those higher payments on a shorter-term loan may be fine now, but how will you cope if your life hits a bump as a result of sickness or unemployment? And a cash-out refinance can certainly leave you worse off unless you address your bad borrowing habits. But those options can work really well for the right borrowers.