5 Ways to Pay off a Mortgage Loan Early

Although it can take up to 30 years to pay off a mortgage, there’s no rule that says you have to spread this debt over three decades.

An “estimated 20 million Americans own their homes outright,” reports Dave Ramsey, author of the best-selling book The Total Money Makeover. And if you’re looking to join this club sooner rather than later, adjusting the way you pay your mortgage can get rid of the loan quicker.

Now, this achievement may appear to be a far-off dream, but there are practical ways to make it happen.

1. Submit Bi-Weekly Mortgage Payments

Paying one-half of your mortgage payment every two weeks can shrink your term by six or seven years. Given how there are 52 weeks in a year, bi-weekly payments result in 26 half payments – the equivalent of 13 full payments or one extra mortgage payment a year.

Although a seemingly insignificant move, this extra mortgage payment decreases the amount of interest you owe over the life of the loan and ultimately shortens the length of your mortgage term.

Unfortunately, a bi-weekly schedule isn’t something you can do on your own. You’ll need to get permission from your lender to switch to a bi-weekly payment schedule, and most banks charge a one-time setup fee.

2. Make Higher Monthly Mortgage Payments 


A bi-weekly mortgage is an effortless way to pay down a mortgage faster, but not all banks offer this option. If your lender doesn’t allow this pay schedule, you can still pay off your mortgage early by sending one extra principal payment a year.

There are different approaches for submitting the extra payment. You can make a double mortgage payment once a year, and specify on the payment coupon that you want the extra amount credited to the principal only.

Another option is increasing each mortgage payment by 1/12, which might be more manageable than a double mortgage payment. Simply divide your regular payment by 12 months and then add this extra amount to each future payment.

For example, if you’re scheduled to pay $1,400 a month, increasing each payment by $117 results in one extra mortgage payment a year.

 3. Refinance Your Mortgage

If you’re only a few years into a 30-year mortgage term, refinancing to a 10 or 15-year mortgage is another strategy for paying off a home sooner. Shorter terms increase how much you pay on a monthly basis, but the increase may not be as high as you think.

Some people mistakenly assume that cutting a mortgage term in half will double their mortgage payments. However, shorter repayment periods typically justify a cheaper interest rate, and this lower rate can translate into surprising savings.

To illustrate: a $200,000 mortgage for 30 years with an interest rate of 4.25% comes to $983 a month, excluding taxes and insurance.

If you take the same mortgage and reduce the term to 15 years, you might qualify for an interest rate of 3.29%. Based on the second scenario, you’re looking at a mortgage payment of $1,409 – a difference of just $426 a month.

4. Reduce Your PMI

If you are homeowner who did not put down at least 20% as your down payment, you will have to pay what is called private mortgage insurance, or what is commonly referred to as PMI. PMI is added to your monthly mortgage payment until you get to 20% equity.

If you have to pay PMI, considering to make more than the monthly payment would be a good idea as the extra amount would go towards the principal, thus bringing the loan amount down and equity up quicker.

By doing this, you will pay off the PMI much faster than if you just made the minimum payment, which will save you money in the long run.

5. Switch to a Shorter Loan

Today, many homeowners have a 30-year fixed mortgage loan. One way to possibly help pay down your loan quicker is by switching to a 15-year mortgage.

If you can afford to make a higher payment, then this would be a great alternative as you would save years of interest compared to a 30-year loan.

One of the benefits of a 15-year fixed mortgage is that the interest rate is a noticeable amount lower than that of a 30-year fixed.

More often than not, if you are a homeowner who plans on paying off their mortgage early, it might be a good idea to consider a 15-year loan over a 30-year loan depending on your current financial situation.

Bottom Line

How you spend your disposable income is entirely up to you. And while you can probably think of a million other uses for the extra income, paying off your mortgage early has one undeniable, priceless benefit – peace of mind from knowing that you own the property free and clear.

source: totalmortgage.com

Thinking of Refinancing? 4 Good Reasons to Follow Through

For the past couple of years, mortgage rates have been lower than they’ve been in decades. So if you’re thinking about refinancing your home loan, now’s as good a time as ever.

Refinancing involves getting a new home loan to replace an existing one. If you’re unfamiliar with refinancing or if you don’t understand the benefits, trading one mortgage for another might seem pointless. However, refinancing a mortgage loan is one of the most effective ways to modify your mortgage terms. Here’s a look at four things you can accomplish by refinancing your home.

1. Get a cheaper interest rate

Since mortgage rates can change from year-to-year, the rate you’re paying might be higher than current mortgage rates. You might also have a higher rate if you didn’t have the strongest credit score when originally applying for the loan. If your credit has improved since buying the home, this is your chance to get a cheaper rate. Unless you’re able to get a mortgage modification, refinancing is the only way to take advantage of lower mortgage rates, which can save thousands in interest over the life of your loan.

2. Get a lower mortgage payment

Not only can refinancing lower your mortgage rate, it can lower your mortgage payment. Your monthly payment is based on your loan amount and your interest rate. And if your monthly interest charges decrease due to a lower rate, so does your mortgage payment.

Depending on the difference between your old and new mortgage rate, refinancing can potentially reduce your mortgage payment by hundreds every month. This creates additional cashflow that can be used for other purposes, such as paying off credit cards, saving for retirement or building an emergency fund.

3. Get a fixed-rate mortgage

If you have an adjustable-rate mortgage, refinancing to a fixed-rate home loan is the only way to get a fixed, predictable mortgage payment. Adjustable-rate mortgages have a fixed-rate period, which is typically between three and five years. After this period, the interest rate resets every year, either increasing, decreasing or staying the same. Locking in a fixed-rate offers protection from rising interest rates.

4. Get cash from your equity

If you’re sitting on thousands of dollars of equity, you don’t have to sell your property to get this money. A cash-out refinance puts equity in the palm of your hands. You can use the money for debt consolidation, college expenses, a wedding, home improvements or start a business. You can borrow up to a percentage of your available equity, usually 80 percent. Just know that a cash-out refinance increases your mortgage balance, often resulting in higher monthly payments.

The Bottom Line?

There’s plenty to think about before refinancing your mortgage loan. It’s important to understand exactly why you’re refinancing, and you need to weigh the pros and cons. There’s no way to know for certain when rates will rise again. So take advantage of low mortgage rates and save money while you can.

source: totalmortgage.com