As one of the biggest expenses in most Americans' budgets, a home mortgage payment is a tried and true way to make sure you pay yourself every month as a landlord. The added bonus includes a roof over your head and an endless list of repairs. The joys of home ownership are never ending!
A typical 30 year mortgage will amortize thousands of dollars of interest across 360 months, but adding $100 extra every month can reduce your payments by several years. Who wouldn't want 36 months of no mortgage payments?
Unfortunately, more people spend 11 minutes taking an online quiz on what type of potato they are but won’t read for 5 minutes about paying down a mortgage faster. While we're on pins and needles to find out if Golden or Red is our home fries winner, this post is a short read, but it could very well be the game changer in finally getting you to commit to paying down that debt hog. Even if you’re locked into an FHA or VA loan, there are still ways to reduce your loan term and save thousands in interest.
If you’re one of the few bold enough to think there might be a better way to reducing your home debt-congrats! After this, you can go find out if you’re a real red potato or a Idaho baking spud. Link at bottom.
“It takes as much energy to wish as it does to plan.”—Eleanor Roosevelt
1. Increase the number of your payments
The easiest way to get to the finish line is to make more than the normal number of payments on your standard 12 month/360 (30 year) mortgage. By splitting your monthly payment in half, you’ll make bi weekly payments instead. So if your normal payment $1200, you’ll pay $600 the first two weeks of the month and $600 the last two weeks of the month
You can try this method with no risk, simply by planning to make 13 payments a year instead of 12. Some lenders will accept bi-weekly payments, so call ahead and ask them what is allowed on your mortgage payment plan. If they do not, you can still send in “over payments” in the amount to equal the bi weekly amount.
Another way to try this approach is to add more every month towards the principal. This method can save you thousands of dollars over life of the loan. If you have a 30 year mortgage balance of $250,000, with an interest rate of 4%, adding $100 on top of your regular payment to the principal balance will take off four years and $27,957 from the mortgage. Time and interest is saved, a double win!
This method does not require any bank approval or refinancing, but make sure your extra amount goes to principal or it won’t turn out properly. It is the equivalent of turning a 30 year loan into a 25 year loan depending on how much extra you can add to the monthly principal. In addition, if for any reason you cannot make the extra payment amount, you can skip it.
“You must gain control over your money or lack of it will forever control you.”—Dave Ramsey
2. Officially refinance your mortgage
A more strategic route to reducing your mortgage is to go all in and refinance it. If interest rates are lower than your current rate, this method may work best for you. Also, take a close look at the fees that come with a closing a new loan. They may push it into numbers that won’t work out.
One of the most preferred loans is going into a shorter term, for example from a 30 year into a 15 year. Interest rates for a shorter term loan are typically more favorable (read: cheaper!), so even though your monthly payment is higher than before, you’re paying less in interest and over a shortened term.
"A nickel ain't worth a dime anymore."-- Yogi Berra.
3. Mortgage recast
This method works if you have a lump sum amount you'd like to use to pay down the principal of the debt immediately for a conventional mortgage. VA and FHA loans cannot be re-cast. Unlike a refinance, a re-cast won't affect your mortgage interest rate, so if you have a lower rate, you get to keep it. The lender will adjust your loan's amortization schedule to show the new balance afer the lump sum is paid in. This also reduces the loan term. Lenders may charge you a fee to do the re-casting, so be sure to find out how much it costs before you go ahead and drop a big lump sum toward your principal.
4. Lump sum payment
Don’t want to do a re-cast of your mortgage? Or perhaps you have a FHA or VA loan? But you still want to chip away at the principal amount? Many folks may choose to put a large sum of cash to pay down their mortgage, split over several months or even years. For example, an annual tax refund, selling off some stocks, gaining an inheritance, selling valuables or getting a bonus from work, are all ways people make their money work harder for them, by paying down their mortgage principal first. Similar to a mortgage recasting, a lump sum payment won’t change your interest rate but will shorten the life of the loan. Be sure to direct the bank to put the money towards the principal.
Congratulations, you made it to the end of the article, now go find your true potato DNA!
What's worked out best for you? Share your tips and comments on repaying your mortgage early below.
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Jennifer Kinzle, Premier Agent
Charles Rutenberg Realty of Naperville, IL
Fox Valley Homes Specialist, 630-854-4360
About me: I take a deep dive into coffee, chocolate, and real estate in the St Charles and Fox Valley area and enjoy blogging, selling homes, finding great investments, and helping buyers and sellers with all their real estate questions.
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