Owning a home is clearly number one on the wish list for many of us. However, owning a home outright is a close second. From a financial perspective, paying off your mortgage faster is a smart move.
Being mortgage-free allows you to decrease your monthly expenses dramatically and enables you to finally give your retirement, children’s college fund, and day-to-day savings account the attention they deserve.
Throughout the first few years of your mortgage, the majority of your payment will go towards interest. These tips can help you avoid the interest-trap and work towards living the mortgage-free life you deserve:
1. Choose a 15-year fixed rate mortgage. Most homebuyers choose a 30-year fixed rate mortgage because it allows them to pocket several hundred dollars more than a 15-year term each month. While this may be a sensible option, if you’re able to forgo the extra $400 or so in your bank account, choose a 15-year fixed rate.
- If you take out a loan for $200,000 at an interest rate of 6% for 30 years, your monthly mortgage payment will be $1,199 and you’ll pay over $231,000 in interest throughout the course of your mortgage.
- If you take out a loan for $200,000 at an interest rate of 6% for 15 years, your monthly mortgage payment will be $1,688 and you’ll pay just over $103,000 in interest throughout the course of your mortgage.
- Though a 15-year term will force you to pay a higher amount each month, you’ll be free from paying a mortgage in just 180 months and you’ll save $100,000 or more in interest payments.
- 15 year fixed rate mortgages boast lower interest rates because the lender assumes a lesser risk than a 30-year mortgage term.
2. Make regular lump sum payments. At the start of every year, make an extra lump sum payment towards your principal. When writing the check, specify that this payment should be applied to “principal only” as most lenders will simply apply the extra payment to interest, if given the opportunity.
- Apply your Christmas bonus towards making this extra lump sum payment. Or, if your employer is less generous, simply set aside $25 per week throughout the year and send in an extra check of $1,300 in addition to that month’s mortgage payment.
- Lump sum payments can be made at any time of the year you choose. However, most lenders set restrictions as to how many times per year you can make lump sum payments.
3. Send a second check each month. As stated above, the majority of your mortgage payment goes towards interest; in many cases up to 75% of your payment is applied towards interest. But, you can beat this catch 22 by sending an extra check to be applied only towards your principal in addition to your monthly mortgage.
- By doing this, you continue to pay your interest and heavily decrease the amount you owe on principal over the course of just a few years.
- Only send as much as you can afford. It can be anywhere from $50 to $300 or more. Though paying off your mortgage faster is a priority, it makes little sense to unnecessarily dig yourself into a financial hole.
- Many people opt to send biweekly payments towards the principal (you must arrange this with your broker), but there is security in taking this approach. If your income decreases, or if other expenses increase, you can stop making extra payments towards your principal at any time without penalty.
Other conventional options of paying off your mortgage faster include arranging biweekly mortgage payments, refinancing your home, or opting for a balloon mortgage. But you can avoid the hassle of these more complicated processes by simply working strategically with your existing mortgage.