Are you at the point where you want to consider paying off your mortgage? Does it seem overwhelming in that the balance amount is more than you ever thought of tackling before? How do you eat an elephant? One bite at a time. Little by little, you will chip away at it and before you know, you will be completely debt free.
Make Extra Payments
Instead of making your normal monthly payments, divide your monthly payment by two and pay it every two weeks. So, if your monthly mortgage payment is $1,500, pay $750 every two weeks. Doing this, you’ll pay an extra payment every year. Instead of paying $18,000 annually, you’ll end up paying $19,500. The best way to do this is to pay online and apply it to your monthly payment each month to make sure it’s covered and then put any extra toward principal. **Be careful of doing this. I had an issue with a previous mortgage company who applied each extra payment to the principal so then they kept trying to tell me that I didn’t pay my full payment. It was a nightmare logistically so I had to stop doing it altogether and try a different tact. You may want to speak to your lender to make sure that it will function correctly.
Pay More Per Month
Another option is to simply pay a little more per monthly payment. This can save you thousands on the life of the loan. If your mortgage payment is $1,500, pay $1,600 or even $1,750 per month. Each additional amount will be applied directly to the principal and reduce the total amount of interest required to be paid.
Let’s take a 30-year mortgage with a balance of $250,000 and an interest rate of 4 percent. If you make an additional $100/month to the principal balance of your loan, you’ll shave off four years and $27,957 from your mortgage. Try rounding up your payment to the next $100 increment. Instead of $743, pay $800. Or $900, instead of $860.
The great thing about doing this is that you pay extra if you can, but you’re not penalized if you can’t. So, if something happens to you financially where you can’t pay more, you are not locked into doing so. This is a benefit as compared to refinancing to a 15-year loan. If you decide that you can’t add in an additional amount, don’t use this as an excuse to purchase unneeded items instead of tackling your debt.
Refinance Your Mortgage
Refinancing only makes sense if you can get a lower interest rate. With most refinancing options, you have extensive fees, so make sure you ask your lender about a break-even time frame. Which means how long before you make up for the amount of fees that you pay for the refinance. A viable option could be to refinance from your 30-year mortgage into a 15-year. It will bring down your interest rate, but will keep you strapped with higher monthly payments. It will definitely set you on the path to paying your home off earlier, but if you have variable income or don’t have a large savings cushion, I would be hesitant to take on a mortgage payment that was significantly higher than the previous payment amount.
A better option for you may simply be to pay as if you had a 15-year putting the extra money down. The pro is that you will take aggressive action to reduce your principal balance and you are not locked into a hefty payment. The con is that you will pay 30-year interest rates which will be higher than the rate of a 15-year mortgage. You have to decide if the reward of the lower interest rate is a big enough reward for you to be mandated to pay a higher amount. You take the risk of not being able to make the monthly payment.
Recast Your Mortgage
Mortgage recasting is different than refinancing because you keep your existing loan, pay a lump sum toward the principal and your lender then adjusts your amortization schedule to reflect the new balance. This will result in a shorter loan term.
One major benefit to recasting is that the fees are significantly lower than refinancing. Usually, mortgage recasting fees are just a few hundred dollars. Plus, if you have a low interest rate, you get to keep it. On the flip side, if you have a high interest rate, refinancing might be a better option. Recasting cuts your monthly payments and the amount of interest you’ll pay over the life of the loan. It does not, however, affect your interest rate or the terms of your loan. Check with your lender to see if they might offer this. Of course, if your goal is to ultimately pay off your mortgage, take advantage of the lower payment and continue to pay more on it to reduce the principal even quicker.
Lump Sum Payment
A lump sum payment is an alternative to recasting. Certain loans (VA/FHA) cannot be recast so a lump sum payment may be a good option. If you receive a bonus, inheritance or you sell a high value item, this might be a great possibility. Be very clear that the large lump sum will be applied to the principal instead of pushing your payments back.
Dollar a Month
Usually, people feel that the Dollar of Month plan is feasible for them to implement. Each month, increase your payment by $1. Pay $900 your first month, $901 the next month, and so on. If you have a 30-year mortgage with a 6% fixed rate for a loan of $150,000, you could reduce your mortgage term by EIGHT YEARS! That’s incredible. This is a good plan of action considering you imagine your income to be increasing over time.
Just Because You Can, Should You?
Most loans do not have a prepayment penalty as those loans are fairly rare nowadays. Confirm with your personal lender to make sure you do not have this limitation. If it does, you may be taxed with additional fees if you pay it down too quickly. Some loans require that you follow the payment schedule.
Deciding to pay off your mortgage may have you looking at many factors before going down that trail. Interest rates, personal risk tolerance, and more. Start by considering your costs at doing any of the options above. If you’re paying off a mortgage with low interest rates (<6% “ish”), you may consider instead putting money in another venue that earns you a bigger rate of return. You could do them in tandem. For example, if you want to pay an additional $200/month toward your mortgage, put $100 toward the mortgage and $100 into a high yield savings venue. Review my blog on Emergency or Reserve Funds (June 16, 2021) to look into saving options with higher rates of returns. https://realpamelaferguson.wixsite.com/website/post/emergency-or-reserve-funds
If you don’t have a full emergency fund and everything else in check, I would definitely refrain from attempting to focus on your mortgage. You don’t want to tie all of your money in your home (where it’s harder to liquidate) when you don’t have money set aside for emergencies. Overall, it’s generally better in the long run to keep the mortgage with a low rate and choose to invest the extra cash instead. Check out Bank Rate’s Mortgage Payoff Calculator to see how much you can truly save by getting rid of your mortgage if you’re still determined that you want to do it. https://www.bankrate.com/calculators/mortgages/mortgage-loan-payoff-calculator.aspx
Comments