How to pay off your mortgage early: financial advice

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Most of us take out a mortgage when we buy a house and agree to make payments for 30 years during the process. But government estimates show Americans are moving on average 11.7 times in their lifetimeso many people are starting to chip away at decades of mortgage payments more than once.

With that in mind, it might be a good idea to look for ways to pay off your mortgage sooner, either to build up equity faster or to save money on interest. Ultimately, owning your home should be the goal. After all, it’s much easier to retire or cut back on work hours later in life if you’re able to forgo your monthly mortgage payment.

Corn, How? ‘Or’ What can you pay off your mortgage sooner? Fortunately, the vast majority of mortgages today are free of prepayment penalties, meaning you can pay off your home as fast as you want.

So if you’re wondering how to lower your mortgage payments or pay off your home faster, there are several proven strategies that can help. Remember that the right strategy for you depends on how much “extra” money you have, as well as the priority of getting mortgage free.

Imagine you buy a property for $360,000 with a down payment of $60,000 and the interest rate on your 30-year home loan is 3%. A quick look at a mortgage calculator shows that the principal and interest payment on your loan amounts to $1,264.81 per month.

You could just make that monthly minimum payment of $1,264.81 and cover the interest charges and part of your principal balance. However, if you pay more than the minimum on your mortgage, every “extra” dollar will go directly to your principal.

If you started this mortgage paying $100 more per month from day one, you would save $19,437 in interest payments and save over three years on your repayment schedule. Or, if you pay $200 more per month, you’ll save $34,428 in interest payments and pay off your home loan in 24 years instead of 30.

And the news gets better and better if you’re able to increase your monthly payment more over time, because again, every dollar above the monthly minimum goes entirely towards paying off your mortgage.

While you can choose to pay any amount over your minimum mortgage payment each month, you can also opt for bi-weekly mortgage payments instead of paying monthly. With bi-weekly payments, you’ll end up making 26 half payments on your mortgage over the course of a year, versus the 12 full payments you normally would, which equates to just 24 half payments.

Since a calendar year is technically 52 weeks, not 48 weeks, you end up making two extra half payments each year using this strategy. This equates to a full additional mortgage payment each year, which can help you reduce interest payments and become a homeowner faster.

Based on this example, an additional mortgage payment (principal and interest only) would save you $21,418 in mortgage interest and reduce your mortgage repayment schedule by three years and six months.

Just make sure you not pay a fee to your mortgage company to make payments every two weeks. If your mortgage agent doesn’t offer this option, you can pretty much achieve the same goal by sending an extra mortgage payment each year, or by taking the principal and interest from your mortgage payment, dividing it by 12 and adding that amount to your monthly payment.

So, in the example above, you would divide $1,264 by 12, which equals $105, and add that amount as excess to your main balance each month. It’s not exactly the same result as making payments every two weeks, but it’s very similar.

If you receive some sort of windfall, such as an inheritance or a large tax refund, you may also consider making a lump sum payment for your mortgage. This would immediately reduce the principal balance you owe, which would help you save money on interest and shorten your repayment term in one fell swoop.

Using the same example above, let’s say you inherited $10,000 and decided to throw it on your mortgage right after you bought your house. In this case, you would save over $14,000 in interest over the life of your mortgage and also pay off your home loan over a year and a half earlier than originally planned.

With today’s still relatively low mortgage rates, you can also pay off your home faster, save money on interest, or both by refinancing your mortgage into a new home loan. According to recent stats from mortgage giant Freddie Macborrowers who refinanced their main mortgage in the first half of 2021 lowered their interest rate by more than 1.2% on average.

Freddie Mac also says borrowers who refinanced from one 30-year home loan to another during that time saved more than $2,800 a year in principal and interest payments.

However, 30% of borrowers during this period chose short-term loans when refinancing, typically moving from a 30-year home loan to a 15-year mortgage. This step allows borrowers to pay off their mortgage faster with a punch – first through lower interest rates, then through higher principal repayments.

Although a 15-year mortgage comes with a higher payment, you will inevitably pay down your principal balance and grow your principal faster. If you’re wondering how to refinance your mortgage, checking rates with at least three or four different lenders is the best way to start. Using an online lending marketplace like LendingTree is an easy way to get offers from multiple lenders at the same time.

Of course, you don’t have to refinance your mortgage to pay it off in half the time. You can also stick with the mortgage you have and then use a mortgage calculator to see how many extra payments you need to make to pay off your mortgage in 15 years instead of 30. Using our earlier example of a 30-year mortgage for $300,000 at 3%, you would need to pay just over $800 in additional mortgage principal payments each month to own your home in 15 years instead of 30.

Even if you can pay off your mortgage sooner, should you really? Only you can answer this question, and the correct answer depends on your goals and personal risk tolerance.

Since mortgage rates are still relatively low – although they are no longer historically low – it may be a good idea to tackle other debts you have before worrying about prepaying your mortgage. If you have high-interest credit card debt and other unsecured debt, it almost always makes more sense to focus on paying off those debts first.

In the meantime, you should strive to have an emergency fund to cover unexpected expenses that may arise if you face a loss of income, lose your job, or end up having to pay unexpected expenses. After all, paying off your mortgage early can help increase the equity in your home, but that value is locked away and you can’t access it quickly if you need it. With that in mind, most experts suggest having a fully stocked emergency fund with at least three to six months of expenses that you can easily access if you need it.

Finally, you need to make sure you’re saving enough for retirement and other goals before you get too aggressive about paying off your mortgage. Owning a home can make reaching retirement much easier, but you also need to save money for retirement.

Ultimately, paying off your mortgage early is a smart way to grow your net worth faster and save money along the way. However, first make sure you have all your financial problems in a row before you start paying off your mortgage sooner than expected.

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