Tuesday, October 18, 2011

3 Ways to Pay Your Home Off Sooner

Alright homeowners, are you ready to hear how you could potentially save tens or even hundreds of thousands of dollars over the next 30 years?  Depending on the value of your home, you could see some HUGE savings with very little effort or stress on your part.  I'm talking about paying off your mortgage sooner, which will give you peace of mind, control, and a little extra money in your pocket down the road.  For all of you homeowners out there, I'm assuming you could use all the help you can get.  For all the calculations and comparisons provided, we'll assume a $225,000, 30 year fixed mortgage at 4.25%.  Let's see how the numbers stack up.

Pay Bi-Weekly
The current mortgage system is set up for 12 monthly payments over the course of each year.  A great way to pay your mortgage off sooner is to set up "bi-weekly" payments, meaning that you pay one-half of your mortgage payment every two weeks.  Now it might not seem like much, but consider this,  over the course of a year, you end up paying the equivalent of 13 payments without it feeling like you made that extra payment.  That's the beauty of this method. 
Bi-Weekly Payments Total Savings:  $29,373.08 - Mortgage paid off after 25 years

Refinance to a Shorter Term Mortgage
If you have a higher interest rate, right now is a great time to refinance.  Beyond refinancing to lock in a great interest rate, consider refinancing to a short term mortgage like a 15 year mortgage.  Obviously, amoritizing payments over a shorter term will increase the monthly payment, but that's exactly the point--you want to pay off your mortgage sooner.  Be sure you are financially stable enough to afford the higher monthly payments.  It doesn't have to be a 15 year mortgage, some lenders have different terms available, just ask them what products they have to help you.  There are closing costs, just like any other loan, so keep that in mind.  (For a little extra kick, refinance to a 15 year mortgage and make bi-weekly payments...)
15 Year Mortgage Refinance Total Savings: $93,798.55 - Mortgage paid off after 15 years
15 Year Mortgage (w/ Bi-Weekly Payments) Total Savings: $103,373.60 - Mortgage paid off after 13 years

Just Pay Extra
To avoid the refinance charges, simply pay as if you had a 15 year mortgage each month.  That way you get the benefits of a 15 year mortgage without the stress of being locked in to a higher monthly payment.  Another way to pay off your principal is to round payments off.  In the example, your monthly payments would be $1,106.86 per month.  Try rounding up to $1110.00.  Simple additions can really add up because when you pay a little extra towards your principal you get an added bonus, each future payment will have more of your payment going towards the principal than the interest and your loan gets paid off sooner.  Get a raise or a bonus?  Apply that extra income to your loan.  Get creative, it'll pay off huge.

Drawbacks of Paying off Your Mortgage Sooner
Paying off your mortgage early saves you money, saves you time, and is very safe and conservative.  There are certain situations where paying your mortgage off early, or paying extra every month won't work well for you.  First, above all else, before you pre-pay or get fancy, check your mortgage contract for a pre-payment penalty clause.  Make sure your lender allows you to pay down your mortgage faster.  Also, if and when you are able to add extra payments, make sure all your extra payments are applied towards the principal, not the interest.  Some lenders will simply apply them to the next months payment, which won't help you at all.  Finally, if you don't see yourself staying in your home for the long haul, don't pay down your mortgage sooner.  You won't see the long term effects of your work and your extra payments might be better used elsewhere, such as a down payment on a bigger and better home, alternative investments, life insurance, etc.  When you put extra money into your mortgage, that money is tied up in the home and is much less liquid than a typical savings account, and its rate of return is 0%.  Keep that in mind before you whip out your checkbook and go wild.  Paying down your mortgage is a very reasonable and effective strategy for those with the financial means to pay extra each month with the intent of living mortgage free, and stress free in the future.

1 comment:

  1. I have had friends on both sides of the fence on this subject. Some are wanting to do everything to pay off their mortgages early and others use their extra money for other things. I think it really comes down to personal risk tolerance. People that want to pay of their mortgage early are usually more conservative and don't want that house bill looming over them for 30 years... Others may want to go on vacations, spend money on their kids, or save it another way. All in all, these are great tips for payin it down if you choose that route!