Buying a home is a long-term financial commitment that typically involves taking on a mortgage for 10, 20 or even 30 years. Knocking out your home loan a few years early may save you thousands of dollars in interest but it’s often easier said than done. If you’re trying to get the mortgage monkey off your back ahead of schedule you need a plan for paying down the debt. Here are a few strategies that can help make your early mortgage payoff dreams a reality.
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Rethink Your Payment Schedule
Many homeowners choose to pay their mortgage on a monthly basis but making a simple change to your payment schedule can make a big difference in how quickly you pay off the loan. Switching to biweekly payments effectively allows you to make 13 full mortgage payments each year rather than 12. Depending on the size of the loan you could shave anywhere from six to eight years off your repayment term just by making this simple change. Keep in mind that doing so means there will be a couple of months where you’ll be making three payments instead of two so you’ll need to budget accordingly.
Paying more towards your principal is a good way to make your mortgage balance drop quickly but finding the additional cash in your budget can be a challenge. The good news is it’s possible to throw a little extra at the mortgage each month even if you don’t have much wiggle room. For instance, if you budgeted $100 for grocery but only spent $90 that’s an extra $10 you could put towards your principal. That $5 rebate check or the $30 your aunt sent you for your birthday may not seem like much but it all adds up and can go a long way towards helping to speed up your mortgage pay down.
Pay a Lump Sum
Receiving an unexpected chunk of change can be a blessing or a curse, depending on what you do with the money. If you find yourself on the receiving end of an inheritance or a sizable tax refund it’s tempting to go out and blow it on a dream vacation or a new TV but using it to pay down your mortgage is a smarter move. Even if it’s just a one-time thing it can cut down significantly on your loan term and the amount of interest you’ll pay.
If you’re planning to make a lump sum payment on your loan you’ll want to check with your lender first to make sure you won’t get hit with a prepayment penalty. Also, if you have a low interest mortgage, there may be other places (like a higher interest credit card debt or personal loan) where the money should go first.
Refinance Your Home Loan
Interest rates are still relatively low, which makes it a great time to refinance your mortgage. Refinancing allows you to reduce your interest rate and it also gives you the opportunity to shorten your loan term. Switching from a 30-year term to a 15-year loan puts you on track to have the mortgage paid off much faster but there’s a trade-off in the form of a higher monthly payment. If your financial situation were to change dramatically it could put you in hot water with your lender if you’re not able to maintain the higher payments.
The other option is to stick with a longer loan term but refinance to a lower rate. This not only saves you on interest but it also frees up extra cash in your budget that you can use to pay down the principal more quickly. If you find yourself in the middle of an unexpected cash crunch because of a job loss or illness having a lower payment will work to your advantage.
Consider a Move
If you’re looking to take more drastic action to reduce your mortgage, you may want to think about downsizing to a smaller, less expensive home. If you’ve built up a substantial amount of equity in your current home you could use the proceeds to buy a new place outright and live mortgage-free. Downsizing isn’t the right move for everyone but if you’re really committed to getting rid of your mortgage debt it’s an option worth considering.
Paying off your home loan sooner rather than later can give you more flexibility when it comes to your budget and your overall financial goals. Instead of shelling out hundreds or thousands of dollars to your mortgage lender each month you could be using that money to fund your retirement, contribute to your child’s college education or fund your dreams of owning a small business. Getting rid of your mortgage debt won’t happen overnight but it can be done, whether you’re taking tiny steps or huge strides.
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