Pay off your home mortgage – For most people, your home is the biggest investment you will ever make. You will likely be spending 30 years paying it off.
While this long payment term means reasonable monthly payments, it also means that you will be paying back almost two times the amount of your initial loan in interest!
That’s the bad news.
The good news is, however, that there are several things you can do to help cut this interest down and pay off your home mortgage loan early, should you choose to do so.
Remember to always speak to an advisor before going ahead with anything prematurely, check Google for help in your area.
Pro’s and Con’s If You Pay Off Your Home Mortgage Early
Of course, there are pros and cons if you pay off your home mortgage early, and your decision should be dependent on your individual situation.
Read on for strategies to help you cut down on interest and get out of debt earlier.
First off, you should consider whether you are better off paying off your mortgage early or investing the money that you would be putting into that.
There are two schools of thought on this. One is that thirty years is a long time to be paying off anything, and you want to get out from under it as soon as possible.
The other is that the interest rates for home loans are actually quite low (compared to any other type of lending) and you can take a tax deduction for the interest.
If you are of the latter school, you may be of the opinion that your money would be better spent on stock market investments, which typically earn just over 5 percent in interest.
While the numbers might indicate that this gives you a slight economic advantage, the fact is that it is not that simple. You must take other factors into account. For example, if you take extra money to invest and do not invest it, it can get spent and you will have made no progress.
Whereas, if you set up your mortgage autopay to include an extra amount, or an entire extra payment, the money comes out automatically. Auto pay takes the money out of your hands before you have a chance to spend it so it’s a great way to both cut back on your spending and pay ahead on your home mortgage loan.
Are You Considering To Pay Off Your Home Mortgage Early?
If you are considering to pay off your home mortgage early, you may also want to look at the term of your loan.
As we stated earlier, most home mortgage loans are set up for a thirty year term. But there are options out there such as the 15 year term. There are also different types of interest rates – adjustable rate or fixed rate.
Fixed rates will stay the same for the life of the loan while adjustable rates will be adjusted up and down based on specific criteria that will be outlined in your prospectus.
15 year fixed-rate mortgage loans will offer a lower interest rate but it’s also likely to have much higher monthly payments.
It’s a good idea if you can afford it, as it will greatly shorten the length of your loan term and the amount of interest paid.
Again, the operative term is “if you can afford it.” 30 year ;loans are the norm primarily because they have lower payments.
They do, however, have higher interest rates. If you want to try to pay off your loan in fifteen years but are nervous that you will be cutting it close with the higher monthly payment, you can always get a 30 year mortgage and then pay for it as if it is a 15 year term.
In other words, you can calculate the amount that you need to pay in order to get out of the loan in fifteen years and pay that amount toward your thirty year mortgage bill every month thus allowing you to pay off your home mortgage early.
If you are running tight on money, you can always cut back to the regular payment amount temporarily.
You simply make the regular payment and when you can afford to, you add in more to cut down your debt more quickly.
Another option are adjustable rate mortgages, which typically have a lower initial interest rate than fixed-rate mortgages.
The trick is that most adjustable rate mortgage terms include an annual interest increase that kicks in after the fifth year of the loan.
You will have to compare the pros and cons of these various types of loans to determine which one will allow you to meet your financial goals and efficiently pay down your mortgage loan.
Bi-Weekly Mortgage Payments To Pay Off Your Home Mortgage Early
A favorite option of many financial experts is the “biweekly mortgage payments” method to pay off your home mortgage loan.
You can check with your mortgage company to see if they have a biweekly payment plan that you can sign on to, or you can simply set up an auto payment or send in a check for the amount due biweekly.
If you pay half of your mortgage amount in biweekly payments, rather than in one lump sum every month, you will actually end up making one extra mortgage payment each year!
Ultimately, this can cut four years of payments off of your thirty year loan term. Pretty cool and allows you to pay off your home mortgage early!
Be forewarned, however.
Banks are starting to catch on to this and some of them have instituted fees for participating in bi-weekly payment options. Wells Fargo, for example, will charge you over a thousand dollars over the life of the loan for the privilege of making just one extra payment each year!
It’s also important to understand that, while biweekly payments do lower your debt more quickly, they will not lower your actually mortgage payment.
The other option would be to invest the money that you would spend paying fees for a biweekly payment option. In the case of Wells Fargo, that’d be $1100 a year, which can really add up.
Regardless of whether you pay monthly or biweekly, there is always the option of adding a little extra cash to your mortgage payment whenever you happen to have it.
Even an extra few hundred dollars a month adds up and could mean that you pay off your mortgage several years ahead of the thirty year term which is the goal to pay off your home mortgage early.
There are mortgage calculators that you can use to figure out how much extra you would have to pay each month to have your home paid off in 15 or 20 or 25 years, instead of thirty.
Another, less painful, way of paying forward on your mortgage is to round your payment up to the nearest hundred. For example, if your payment is $1659, you would pay $1700. Again, these small figures really do add up quickly.
If you should find yourself having difficulty paying toward your loan or you see that interest rates have dropped substantially, it might be worth it to check into refinancing.
Refinancing allows you to change the terms of your loan and it can be beneficial even if you stay in the same term length, in certain situations.
For example, if you refinance a thirty year loan, and get a new loan, which is also thirty years but has a lower interest rate, you will come out ahead.
You’ll have to be careful about closing costs, because sometimes these fees are prohibitively high. It’s only worth refinancing if you can afford the fees and they are substantially less than what you would be paying in extra interest.
If you don’t have much in the way of savings, these fees might be enough to convince you that refinancing isn’t for you as a viable option to pay off your home mortgage early.
The other thing to remember about refinancing is that it resets the clock. While you might get a lower interest rate, you are also going back to the beginning of another thirty year loan term.
If you pay the lower amount of your new loan every month, you will not be able to pay off your home mortgage loan faster. Instead, you will actually be adding time to your thirty years.
However, if you are saving a lot in interest charges and you can continue to pay your old (higher) mortgage, you will be able to pay off your home mortgage loan ahead of time.
Personal Mortgage Insurance (PMI) also plays a role in your mortgage payment and how quickly you are able to pay off your loan. PMI is required by lenders when the loan to home value ratio is more than 78%.
This protects the bank from loss if you default on your own. However, when you dip below this ratio, you can drop the insurance.
The more you are able to pay ahead, the more quickly you can drop this insurance, which adds thousands of dollars onto your loan. In certain government-sponsored loans, such as FHA loans, dropping your mortgage insurance may not be an option.
You might be able to refinance into a conventional mortgage, which does not require insurance.
Lastly, keep this in mind. Working to pay off your home mortgage loan early and investing money do not have to be mutually exclusive!
You can certainly still put money into investments as you are able, while you work to pay off your home mortgage early.
While it does take some discipline and patience to pay off your home mortgage loan early, the extra money and peace of mind will make it well worth the effort!