Lots of us dream of living mortgage-free, and paying your mortgage off early could help you to provide you and your family with financial stability. If you can pay it off early, you might also be able to save yourself some money in the long term by accruing less interest. Here are a few different ways that you could use to pay off your mortgage faster.
Refinance Your Mortgage
If you notice that interest rates are declining, then you might be able to reduce the amount you pay toward interest by refinancing your mortgage. You could also choose to reduce your loan term by a significant amount. Just make sure you do your research carefully and understand how refinancing will change your mortgage and what you owe. It can help you to pay off your mortgage sooner but could mean higher monthly payments. Don’t end up paying more than you can afford, and don’t take this option for the wrong reasons.
Make Extra Mortgage Payments
Another way that you could save some money on the interest on your mortgage, while still reducing the term of your loan is to make some extra payments on your mortgage. Some lenders will charge you a penalty for paying off your mortgage early, so double check before you decide to do this. If your lender doesn’t charge a penalty for doing this, then you could consider one of a few different strategies to pay off your mortgage early.
If you do decide to make extra payments on your mortgage, remember to inform your lenders that any extra payments should be applied to principal, and not to interest. Otherwise, your lender could decide to apply the payments toward future scheduled monthly payments, which won’t end up saving you any money at all.
If you want to make extra payments on your mortgage, then you should try to prepay at the beginning of the loan when your interest is at it’s highest. You might not know it, but the majority of your monthly payment for the first few years of paying your mortgage actually goes toward interest, not principal. Interest is compounded, which means that each month’s interest is determined by the total amount that is owed (principal plus interest).
Make One Extra Mortgage Payment Each Year
Just making one extra mortgage payment each year could reduce the term of your loan significantly. Not everyone can afford to make regular extra payments on their mortgage throughout the year, but even one extra payment in the year can help.
The way to do this that is kindest on your wallet is to pay 1/12 extra each month. Split one extra payment across each monthly payment, and the extra amount is very small, so should be affordable for you. For example, if you paid $975 each month on a $900 mortgage payment, you will have paid the equivalent of an extra payment by the end of the year. For an extra $75 a month, you can get on your way to being mortgage-free living in retirement.
Round Up Your Mortgage Payments
Another easy way to help reduce the term of your mortgage significantly without spending too much more every month is to simply round up your payments. When you budget for your mortgage payment every month, round it up to the nearest next highest $100 amount. Instead of paying $654, you would pay $700. These small amounts won’t hurt your budget too much but will help you towards your goal to pay off your mortgage early.
Try The Dollar-A-Month Plan
The dollar-a-month plan should financially feasible for you if your income increases consistently, but by a small amount, over time.
With this strategy, you increase your mortgage payment by $1 every month. You would pay $900 for the first month, then increase your payment to $901 the next month, and so on, slowly increasing your payments every month. For a 30-year, $900-per-month mortgage, that has a 6% fixed interest rate on a loan of $150,000, you could shave eight years off your mortgage with this strategy. Those eight years could help you a lot in later life.
Use Unexpected Income
Sometimes you might be lucky enough to get some unexpected income. This could come in the form of a bonus at work, inheritance, money that you win, holiday bonuses, tax returns, or credit card rewards. If you do get any unexpected windfalls, don’t spend them. Instead, if your main financial goal is paying off your mortgage, then send the extra money straight to your mortgage company. Using this money won’t cut into your monthly budget.