People who want to keep their payments down and help their short-term cash flow choose to stretch out their mortgage over a longer period. It might be a good idea, depending on your situation, but remember that you can use that extra money going into your repayments for something else—maybe something that will give you more return. Not to mention stretching out a mortgage will also cost a homeowner more in the long run.
The question now is: What can be done to pay off a mortgage faster? Many homeowners, especially those with mortgages that will last 30 years, feel like there’s no way they can escape the burden anymore.
Fortunately, there are actually good ways to reduce your mortgage faster. These methods will also help you save big on interest payments. Check them out below.
Refinance Your Mortgage Using A Loan With A Shorter Term
Lenders offer shorter mortgage terms even if the 30-year home loan is the most popular among homeowners. Many lenders offer 25-, 20-, 15-, and even 10-year mortgages.
Why should one opt for a 15- or 10-year loan when shorter repayment periods translate to higher monthly payments? Well, shorter repayment periods also mean less interest you pay over a loan’s life. That’s something worth taking into consideration.
If you want to make your mortgage shorter and save money on interest charges, apply for a shorter-term loan, which you can use to refinance your existing one. You wouldn’t know if you could qualify for one without trying. View this post to learn more about a mortgage refinance.
Pay More Than Your Mortgage’s Minimum
Say you have a mortgage repayment responsibility of USD$2,500 a month. Consider spending another USD$300 if you can comfortably afford it.
Paying more than your mortgage’s minimum will save you years of payments and reduce the interest amount you pay.
Consider Making One Extra Payment Every Year
A strategy that homeowners commonly use to pay off a mortgage faster is making one extra payment each year.
Paying half your mortgage every other week is one of the easiest and most effective ways to do it. This will result in what is known as bi-weekly payments. With bi-weekly payments, you’ll end up paying for an extra month annually.
However, it’s essential to note that your loan provider could be confused about you making irregular, partial payments. That being said, you can’t just start making a mortgage payment every two weeks without talking to your lender. Make sure to arrange this plan first before starting with it.
Make Lump-Sum Payments If You Have Extra Cash
Consider putting in extra money towards your home loan. Maybe you’ve off-loaded some shares, sold an asset, had a tax refund, or received an inheritance recently. Whatever the case is, making lump-sum payments is a good idea.
A portion of regular mortgage payments initially goes towards interest. However, with lump-sum deposits, the full amount you’ve paid goes straight to the loan itself. That’s how a lump sum can significantly reduce the money and time homeowners spend paying off their mortgage.
Float A Portion Of Your Mortgage
If you want to avoid incurring financial penalties when making lump-sum payments, consider floating a portion of your mortgage.
A floating mortgage lets you pay less interest. While the minimum repayments you have to make will stay the same, more of them go towards paying off the loan principal. Of course, more money going towards your principal means less time you’ll have to spend paying off a mortgage.
Final Thoughts
Whether or not paying off a mortgage early is the best financial decision to make depends on your financial goals and unique situation.
There are several questions you have to answer to help you make the right decision. How long do you think you'll stay in your house? How much extra funds do you need to work with to make higher monthly payments? How about your emergency fund—do you have one? The methods above can help if your answers to these questions tell you that you’re ready to reduce your mortgage faster.