6 Ways to Pay Your Mortgage Off Faster
Who wouldn’t love the idea of no longer being tied to a mortgage? The freedom associated with zero monthly mortgage payments is incredibly liberating.
The thought of knowing that your mortgage won’t be fully paid off for another 30 years isn’t.
Luckily, there are methods you can put into play to effectively wipe out your mortgage payments sooner rather than later.
1. Make Bi-Weekly Mortgage Payments
Monthly mortgage payments tend to be the popular option among homeowners. It’s also a slower way to pay down your mortgage principle. If you pay $1,600 per month on your mortgage, consider paying $800 every two weeks instead.
Sounds strange, right? Especially considering the fact that two $800 payments equals one $1,600 payment. But the reason why you can slightly increase the speed at which you pay your mortgage off by paying bi-weekly is because you actually make one extra month’s payment each year. With 26 bi-weekly pay periods in a year, you’re putting a little more towards your mortgage without even realizing it.
2. Refinance Into a Shorter Loan Period
While the “default” loan period is typically the 30-year mortgage, there are other options to help significantly reduce the amount paid towards interest and more towards principal. If you’re serious about paying off your mortgage faster, consider a 15- or 20-year mortgage instead of the usual 30-year version. With a shorter and accelerated amortized schedule, you’ll be paying more with each payment, but you’ll reach the end a lot quicker.
And when we say you’ll be paying more each payment, that doesn’t mean you’ll be paying twice as much with a 15-year mortgage compared to a 30-year mortgage.
Mortgage payments are made up of principal, interest, insurance and taxes. While the taxes and insurance portions will remain constant, principal and interest will change. The total interest that you pay over the life of your mortgage will consistently decrease. First of all, you’ll be paying down your principal faster; and secondly, shorter loan periods are typically issued at lower interest rates.
3. Refinance With a Lower Interest Rate
Refinancing doesn’t only have to take place in order to shorten the loan amortization period. Many homeowners also refinance in order to take advantage of lower interest rates. This is especially true if they locked into a particularly high interest rate that they can certainly improve on these days.
Interest rates have been hovering around historic lows over the past few years, allowing homeowners to pay considerably less towards interest and thereby pay down their mortgages faster. Even the penalty they may pay to break their mortgage pales in comparison to how much can potentially be saved by jumping ship from a high-interest mortgage and locking into a lower-rate mortgage.
In this circumstance, plan to continue making the same monthly payments – that way, more of your money will go towards principal, which will help you pay down your mortgage a lot quicker.
4. Make Extra Payments, Even if You Don’t Refinance
If you’re on the fence about refinancing, at least consider making payments as if you had. We’ve already explained the benefits of refinancing from a 30-year mortgage to a 15-year mortgage, including making higher payments each month (and therefore paying your mortgage off faster), and taking advantage of lower interest rates.
Just like many other things in life, it also comes with some drawbacks. One disadvantage to refinancing in this manner is that you forego flexibility. So, if you face a health emergency or lose your job, you might be stuck in a position where you’re unable to pay your mortgage. You’ll also have to pay added closing costs (though you can always roll this money into the new mortgage).
If you’ve already got a lot of years in your mortgage, refinancing may not be necessary. That’s because you won’t have the mortgage long enough to reach the breaking-even point between your current mortgage and refinancing to a new mortgage.
If you’re able or willing to make extra payments towards your mortgage on a regular basis, that may be enough to surpass the rate at which you close your mortgage compared to if you had refinanced to a shorter loan period. Just focus on making enough extra payments to pay down whatever is left on your mortgage.
5. Find More Affordable Home Insurance
Here’s a no-brainer for you: pay less towards home insurance, and you’ll effectively lower the amount of money you’ll be paying every month.
The key here is to continue to make the same monthly payments – with less money going towards insurance, more will be going towards your principal.
Take some time to shop around for quotes from various insurance providers. It’s pretty easy to do these days, especially when you can compare and contrast online.
6. Downsize or Rent Out Part of Your Home
Another obvious tip, but a goodie nonetheless: if you’re really hell-bent on freeing yourself from your mortgage, consider downsizing to a more affordable home. Sell the house you’re currently living in, and take the equity you’ve built up in it to put towards the purchase of a new, cheaper home. You never know, you just might have enough to completely clear the purchase price.
If you’re not willing to go that route, then consider renting out a part of your current home. Finish the basement and convert it to an apartment, or rent out a guest room in your home. Use the income you collect from rent to put towards paying down your mortgage. While you might not enjoy the idea of having someone else living in your home, think about how nice it would be not to have to pay a mortgage any longer!
There are plenty of savvy ways that you can employ to effectively pay off your mortgage faster. Of course, they all require a certain level of diligence and discipline, so make sure you’re ready for it before you make a move. Speak with your mortgage specialist or real estate agent to find out which methods are most doable and comfortable for you to pay your mortgage off faster without being “house poor.”
