October 25th, 2019 9:07 AM by Jackie A. Graves
homeowners are eager to get out of mortgage debt early. The reasons range from
the psychological pressure of being indebted to slashing interest payments.
retirees, paying off your home loan early can help you increase your cash flow.
This is especially beneficial when you transition into a fixed income.
folks, getting rid of debt is a stress relief, more than a financial strategy.
These homeowners might not like the emotional and mental impact of owing money.
finally, by paying down your mortgage ahead of time you will reduce the amount
of total interest you pay on your loan. This can be a substantial savings. The
bigger the loan and the more time you pay on it, the more interest you’ll owe.
You can check Bankrate’s Mortgage Payoff Calculator to see how much you
can save by settling your mortgage early.
your reason, we have strategies that can help you achieve your goal.
4 methods to pay off your mortgage early
off debt early is a feasible goal if you have a budget, extra cash and an
early-payoff plan of action. Here are four ways homeowners can get rid of
mortgage debt and own their house outright.
1. Make extra payments
two ways you can make extra payments that will speed the paying-off process.
The first way is to split your monthly mortgage payment in half and make bi-weekly
payments instead. By doing this, you’ll end up making the equivalent of 13
months of mortgage payments instead of 12. This tactic might be easy for some
homeowners because it’s barely noticeable in the monthly budget.
want to speak with your lender about whether they accept bi-weekly payments,
some might not. In this case, it’s up to you to set aside those bi-weekly
payments, but you’ll make them in one shot each month. The benefit of that
extra annual payment is still there, but without the convenience of the bank
allowing monthly payment splitting.
second approach is to pay more each month to chip away at the principal faster,
which can save you tens of thousands of dollars over the life of your loan. For
instance, let’s say your 30-year mortgage is $250,000 and your interest rate is
4 percent. If you make an additional $100 monthly payment to the principal
balance of your loan, you’ll shave off four years and $27,957 from your
be a better tactic than refinancing as it doesn’t lock you into a payment. So,
if for some reason, you can’t add more to your monthly mortgage payment you
won’t be penalized.
If you go
this route make sure to check with your lender that the payments will be
applied in the correct way to reduce the principal, not prepay the interest.
You’ll also want to make sure they understand the extra payment is not for the
next month’s mortgage payment.
2. Refinance your mortgage
your mortgage to pay it off early only makes sense if you can get a lower
interest rate. Keep in mind, there are fees associated with refinancing so you
want to make sure the savings cancels out the cost of refinancing.
into a shorter-term loan, such as going from a 30-year mortgage to a 15-year
mortgage, can also help bring down your interest rate while putting you on the
path to early payoff. Use Bankrate’s mortgage calculator to compare payments
and total interest between 30-year and 15-year terms here.
3. Recast your mortgage
recasting is different than refinancing because you get to keep your existing
loan, you just pay a lump sum
toward the principal and the bank will adjust your amortization
schedule to reflect the new balance. This will result in a
shorter loan term.
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.
4. Make lump sum payments toward your principal
alternative to recasting is to make lump-sum payments to your principal when
you can. Homeowners who get large bonuses or those who inherit money or sell
valuable items, might choose to use the extra cash to pay down the principal.
Since VA and FHA loans can’t be recast, lump-sum payments might be the next
best thing. Also, you’ll save yourself the bank fee for recasting.
mortgage servicers, you must specify when extra money is to be put toward
principal. Check with your servicer if you are unsure how additional payments
will be applied.
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