WRITTEN BY JAYMI NACIRI
There was a time when taking out a mortgage on a house meant you actually planned to stay there long enough to pay it off and own it outright. In many cases, people bought homes, raised their families, retired, and then passed this valuable asset down to their kids. But, largely, this is not the case anymore. The most recent National Association of REALTORS® 2016 Profile of Homebuyers and Sellers shows that homeowners stay in their houses an average of 10 years – which seems like a lot when you consider how many people move up to a larger home as their family grows, move away for job transfers or other employment issues, or take the equity and run to something better after just a few years.
But that doesn’t mean it doesn’t make great sense to pay off your mortgage early, which can save you many thousands of dollars. “Topping the list for most folks in the ‘Pro’ category is peace of mind,” said The Balance. “Plain and simple, you don’t have to worry about a mortgage payment, and you know you’ll always have a roof over your head if, for example, you lose your job. For a lot of folks, knowing they’re not paying their hard earned money to the bank in the form of interest is also a plus. But freeing yourself from a big mortgage payment also gives you more financial flexibility to do other things.”
Here are seven ways to go about it.
1. Make an extra payment per year
Making 13 payments instead of 12 in a year can save you thousands and shorten your loan. “One way to pull off this tactic is to save 1/12 of a payment every month, and then make an extra payment after every 12 months,” said Bankrate. “Let’s say you do this starting the first month after getting a 30-year mortgage for $200,000 at 4.5 percent. That would save more than $27,000 interest, and you would pay off the mortgage four years and three months earlier.”
You can accomplish the same thing by changing when you pay your mortgage. Instead of making one mortgage payment per month, split it up into two. “A bi-weekly mortgage payment program is meant to short-circuit your loan’s amortization schedule,” said The Mortgage Reports. Instead of taking 12 payments per year, the bi-weekly payment plan asks for one payment every two weeks, which adds up to 13 payments per year. With each ‘13th payment,’ your loan balance is reduced by the entire amount of the payment. You reach your loan’s payoff date sooner.”
2. Make an extra payment each quarter
Want to be a little more aggressive than that about getting your mortgage paid off early? “Make an extra house payment each quarter, and you’ll save $65,000 in interest and pay off your loan 11 years early,” said Dave Ramsey – an example that’s based on “the average $220,000, 30-year mortgage with a 4% interest rate.
It may sound counterproductive to add to your mortgage balance while your goal is to lower it, but, depending on your existing interest rate and the new one you could get, it might be a great move, especially if your closing costs are low. Remember, though, that, while your monthly payments will drop and you will save money on all that interest you don’t have to pay, “It won’t accelerate your pay-off date,” said Forbes. “(In fact, it may extend that date even further out into the future.) Refinance into a 30-year mortgage with a lower rate, and then continue making the same monthly payment that you were previously making. This ‘extra’ money (the gap between your new, lower monthly payment and your original monthly payment) will get applied to the loan as an extra principal payment. And this will accelerate your payoff date.”
As long as you’re refinancing with the goal of paying your mortgage off sooner, switch from a 30-year to a 15-year loan. By refinancing that same $200,000 loan at 4.5 percent into a 15-year loan at 4 percent, you can pay off the mortgage “10 years earlier and save more than $60,000,” said Bankrate.
5. Get rid of PMI
Refinancing is also a good idea if you’re looking to lower your payment – and apply the savings toward your mortgage balance – by removing your PMI. “If a home was purchased with less than a 20% down payment, the bank is probably charging PMI,” said Mortgage Calculator. “However, once the borrower owns 20% of the home, this charge could be eliminated.”
6. Apply any windfalls
Get a raise? A bonus? A surprise cash gift? Instead of taking that vacation or putting it into your savings, apply it to your mortgage balance. “A $10,000 lump sum payment on that 30-year, fixed-rate mortgage for $200,000 at 4.5 percent “pays off the mortgage two years and four months earlier, and saves more than $19,000 interest,” said Bankrate.
7. Save those pennies
They do add up, especially if by “pennies” you mean dollars. If you apply the same saving techniques toward paying off your mortgage as you did to get your down payment together, you should be able to carve away at the total owed. Even an extra
$100 a month toward your principal can save you more than $30,000 in interest over the life of your loan – or more, depending on your interest rate and mortgage total.
One of the easiest ways to chip away at your mortgage is to simply “round up your payments so you’re paying at least a few extra dollars a month,” said Dave Ramsey.