Paying off mortgage as fast as possible is listed as the baby step no. 6 in Dave Ramsey’s well known doctrine on achieving financial freedom. According to the famous American financial advisor mortgage payment in full is a dream of many and entices one and all towards a life with absolutely no home loan overheads.
Expert opinion is divided on this point though. Some believe that paying off your mortgage as early as possible is a wise move as it would not only have psychological benefits but also long-term investment benefits.
Other financial experts think that because the rate of interest on a mortgage is pretty low, mortgage payment in full can be deferred till other high interest debts like credit card debts have been cleared off.
Let us see what the statistics tell us.
- As per magnifymoney 65% of American homeowners are still to pay off their mortgage.
- According to fivethirtyeight average age of a person not having a mortgage is 63 years old.
- A survey by Northwestern Mutual’s revealed that 40% of Americans aged >55 years believe that paying off their mortgage early was the best financial decision they took.
Hence, we see that whatever the experts might think, when it comes to a mortgage payment common public would like to go by Dave Ramsey’s adage. Pay Off Home Early!
Well, that’s easier said than done. When paying monthly installment in itself looks like a huge victory every month, how to pay off mortgage early would definitely look as insurmountable as climbing the Mt. Everest!
Well, it might come as a surprise but Mt. Everest has been summited more than eight thousand times till date. And so, can Mt. Mortgage be summited!
What we need to do is just follow some easy, simple and effective steps that would help ease off your heavy burden sooner than you expected.
Best Ways to Pay Off Your Mortgage Early
- Bi-Weekly payments
- Paying towards the principal
- Cutting on expenses
- Using unexpected gains
#1. Bi-Weekly Payments
Most mortgage loan installments follow a monthly payment ritual. That would mean a total of 12 installments in one year. How would it look if you are able to pay one extra installment every year without having to save more to do so?
Suppose you have a loan amount of $200,000 at 4% rate of interest to be paid over a period of 30 years. Using a mortgage calculator, you will know that if you pay through a monthly installment of a thousand dollars, then your total interest would amount to $143,739.
Now, if instead of paying full $1000 you pay it in two installments over a month, i.e. make bi weekly payments of $500 in one month. Then your total interest will amount to $121,300! A Saving of more than $20,000 is achieved by just one change.
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What’s more you will be able to pay the whole mortgage 5 years earlier too. How was that possible?
The reason behind this is simple. There are 52 weeks in a year. That would lead to a total of 26 bi-weekly payments or a total of 13 installments instead of 12. And all this would not affect your monthly budget too.
Bi-weekly payments sure rank as the best way to pay off mortgage.
#2. Paying Towards the Principal
Some financial institutions allow paying against the principal amount only i.e. in addition to your mortgage installment that contains payment towards principal and interest, you can pay some amount towards the principal only.
Once the principal amount is lowered, the interest calculated also comes down. This way you can save a lot on the interest amount in the long term.
Just remember that the amount need not be big to take effect. Even small sums like $20 p.m. go a long way in paying off your mortgage as early as possible.
#3. Cutting on Expenses
No one is asking you to skip your lunch in order to save for the mortgage. But you can surely spend a little wisely while you go shopping for your meals. You can achieve some small savings in the following ways:
- Take a home lunch to office instead of buying one daily.
- Cut on your daily coffee trips.
- Quit on unhealthy and expensive bad habits like smoking.
You may not know but these small savings can help you in a big way to save on the interest amounts and to pay your mortgage off faster.
#4. Using Unexpected Gains
Unexpected gains can be in the form of an inheritance or even winnings from a casino game. Other more predictable gains can be in the form of a yearly bonus or salary increase.
By pretending that you never received such gains and putting them towards paying the mortgage is a good idea to pay off mortgage early. Since such gains were never included in your monthly budget not using them would hardly make any difference to your existing lifestyle.
Refinancing the mortgage is also one of the best ways to pay off mortgage quickly. In fact, it is so successful that even the ex-chairman of Federal Reserve Bank, Ben Bernanke used it to pay off mortgage early.
Mortgage can be refinanced in three ways:
- Rate and term refinance
- Cash out refinance
- Cash in refinance
Cash out refinance is done when one wants to increase his/her total mortgage amount. Cash in is opposite of cash out refinance.
The most popular one is rate-and-term refinance which I will explain shortly here.
Continuing with the example discussed in bi-weekly payment, suppose you have a mortgage loan of $200,000 at an interest rate of 4% to be paid in 30 years’ time.
By using the rate-and-term refinance you can customize the loan terms. You can if you want change the term to be 15 years and rate to be 3.25%. Now, using a mortgage repayment calculator you can easily find out what you will gain.
After refinancing not only will you be able to pay off mortgage early (15 years early) but also save more than $90,000 in interest! The only downside is that you will have to pay more in the monthly installment, but if you can manage that, then this is by far the fastest way to pay off mortgage.
Wrapping it up
It is clear that payments on your mortgage can be easily cleared early thus enabling you to live a life without debt. Depending upon your personal situation you can choose any one or a combination of the 5 techniques discussed above.
Time is money literally when it comes to mortgage payments. So, do not delay any further and get that debt cleared off as soon as you can so that you can reinvest your savings in better and more lucrative options.