For a variety of reasons, such as lowering interest payments or removing the psychological load of debt, some homeowners are ready to pay off their mortgages early. Early home loan repayment might help retirees with their cash flow. This is especially helpful when moving to a fixed income.
Regardless of your motivation, paying off your mortgage early reduces the amount of interest you would otherwise have to pay. Savings could be significant as a result of this. Here are some early reward strategies to help you accomplish that goal.
Five methods for paying off your mortgage sooner
1. Increase your payments
To expedite the mortgage payoff process, there are two options to make additional mortgage payments:
- twice-weekly mortgage payments plus a monthly bonus
The first choice is to start paying your mortgage every two weeks after dividing your monthly payment in half. By doing this, you'll pay off your mortgage in 13 months instead of 12, which will result in significant savings on interest. This plan may seem straightforward to some homeowners because it doesn't make much of an impact on their monthly spending.
Check with your lender or servicer first to see if biweekly payments are permitted (most do). If not, you must set aside and consolidate those biweekly payments into a single payment each month. Although you no longer have the lender's convenience of being able to plan payments every two weeks, the benefit of the extra annual payment is still there.
Making additional monthly principal payments or annual principal-only payments is the second tactic. Additionally, it can help you avoid paying tens of thousands of dollars in interest throughout the loan.
Imagine you had a $250,000 mortgage with a 30-year term and a 4% interest rate. If you add an extra $100 each month to the principal balance of your loan, you can shorten the overall length of your mortgage by four years and save $27,957 in interest payments.
Because it frees you from a payment obligation, this tactic might be more successful than refinancing. If for whatever reason you are unable to increase your monthly mortgage payment, you won't be punished.
If you decide to follow this path, it is crucial to verify with your lender that the payments will be used appropriately to reduce the principle and not prepay the interest. You should also make sure the lender knows the extra payment isn't meant to meet the subsequent month's mortgage payment.
2. Mortgage refinancing
Refinancing your mortgage to pay it off faster only makes sense in certain situations, such as when you can get a cheaper interest rate or shorten the loan term. Because there are expenditures associated with refinancing, you should be certain the benefits outweigh them.
Refinancing into a loan with a shorter term, such as switching from a 30-year mortgage to a 15-year mortgage, can lower your interest rate and lead to an early payoff. A shorter period, however, can mean a greater monthly payment, which might strain your resources excessively. Use Bankrate's calculator to compare payments and total interest between 30-year and 15-year maturities.
3. Refinance your loan
In contrast to refinancing, mortgage recasting allows you to keep your current loan while making a one-time principal payment. Your lender then adjusts your amortization schedule to reflect the updated balance. Because of this, your monthly payment will be lower, but your loan duration and interest rate will stay the same.
One of its key benefits is that recasting is far less expensive than refinancing. The average cost of recasting a mortgage is between $200 and $300. (To request the service and verify prices, contact your lender.) Additionally, you get to keep the money if the interest rate is low. On the other hand, if your interest rate is high, refinancing can be a better option.
4. Pay your principal in full in one go.
If you get an unexpected financial windfall or large infusion of cash, an alternative to recasting is to make lump-sum payments to your principal. It might come from a work bonus, a tax refund, an inheritance, or the sale of the property.
Unfortunately, it is not possible to refinance VA or FHA loans. Lump-sum payments may be the next best choice for borrowers with these types of loans as you won't have to pay the lender's recasting cost.
When dealing with certain mortgage servicers, you might need to make it clear that additional payments should be applied to the principal. Speak with your servicer if you have questions about how lump-sum payments will be used.
5. Get your loan modified.
If you are having trouble keeping up with your mortgage payments but want to get back on track and maybe pay off the debt sooner, think about modifying your home loan. A loan modification, which is frequently reserved for borrowers who are facing financial difficulties, entails the lender adjusting the interest rate or loan duration to help keep the debt current.
With this option, you could lower your interest expenses and repay the loan more quickly. However, there can be effects on your credit depending on how your lender or servicer reports it to the credit agencies. Be careful to discuss this in advance with your lender.
Is it possible to make a mortgage prepayment?
Most of the time, paying off your mortgage early is possible without incurring penalties; however, there are a few factors to take into account first.
Initially, enquire with your loan servicer if your mortgage has a prepayment penalty. If it happens, paying off your debt early than intended will result in higher fees. Your capacity to afford an early mortgage payoff may be impacted by this.
Second, find out whether there are any restrictions on the times and methods of your further payments. Some loans include provisions that encourage you to stick to the planned installments, so it's important to make sure that any additional payments you make go to the principal.
Should your mortgage be paid off sooner?
If you should pay off your mortgage early depends on several factors, including your risk tolerance and the interest rate on your current loan.
Start by accounting for opportunity cost. You are investing money that could be used for other financial goals when you pay off your mortgage early. Sure, you'll save on interest, but you might discover that if you had invested the extra payments somewhere else rather than on your mortgage, you would have received a better return.
However, increasing your mortgage payment may be a wise choice if you know you'll spend the extra money even if you don't use it to reduce your loan balance. The peace of mind that comes with not having a mortgage on your property must also be taken into consideration.
Also, take into account how much cash you have on hand for unplanned expenses. All of your money shouldn't be kept in your home locked up with no easy access in case of emergency.
In the end, it is usually wiser, in the long run, to hold a low-rate mortgage now and invest your extra cash while mortgage rates are still low. To find out how much money you can save if you decide to pay off your mortgage early, try Bankrate's mortgage payoff calculator.
Hope that was interesting and you have learned something new, stay tuned.
