Mortgage payments can be a major drain on your budget. Paying off the minimum amount each month can be helpful in the short term, but the extra interest and duration of the loan can make a significant dent in your long term spending power. Fortunately, there are a few simple ways to pay off your mortgage quicker and finally free your budget.
Make an extra payment each year
You can use the length of a mortgage to your advantage by making one extra payment each year. This allows you to save thousands in interest and shave years off of your loan without hitting your finances too strongly. “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 you more than $27,000 in interest, and you would pay off the mortgage four years and three months earlier,” writes personal finance expert Dana Dratch, in a March 2018 article for Bankrate.com.
Saving extra money throughout the year and spending it on an extra mortgage payment all at once can cause a hit to your finances. Avoid this by making biweekly half-payments instead of one payment per month. You’ll end up making 26 half-payments throughout the year, equivalent to the value of 13 monthly payments. “Most people default into making one mortgage payment per month. But if you pay half of your mortgage every two weeks, you’re effectively making one extra month’s payment per year — without really ‘feeling’ it,” says Paula Plant, an award-winning real estate expert, in a June 2017 article for TheBalance.com.
Another solution involves refinancing to a shorter-term mortgage, which usually have lower interest rates. To determine whether this will benefit you in the long term, you will need to calculate whether the money saved is enough to balance against the administrative fees and closing costs involved with processing a new loan — which could add up to a few thousand dollars. “A refinance carries closing costs,” Dratch warns. “And a quicker payoff means higher monthly payments. You’re locked in if you decide that you don’t have the extra money one month to put toward the mortgage.”
If you can handle the higher payments, you can save tens of thousands of dollars in the long term. Dratch adds to remember, “unless the new interest rate is lower than the old rate, there’s no point in refinancing.”
Apply unexpected money toward your mortgage
Plant asks, “Have you ever received ‘surprise’ money such as a bonus, commission, tax refund or inheritance?” Most people would spend that money on short-term purchases, like nice dinners or a new car, depending on the amount received. Both Plant and Dratch, on the other hand, advise applying that unexpected money toward your mortgage. “Let’s say you got a 30-year fixed-rate mortgage for $200,000 at 4.5 percent,” Dratch says. “Then, five years later, you can pay an extra $10,000 in a lump sum. Doing so pays off the mortgage two years and four months earlier, and saves more than $19,000 in interest.”
The upside of using this method is you were not expecting or counting on the money. Therefore, you won’t need the extra money to continue as you were, allowing you to apply it to your mortgage without feeling a financial hit.
“The downside to this approach is that it’s hard to predict the mortgage payoff date,” Dratch adds. If you do plan to go down that route, Plant says it’s important to check with your lender to ensure your contribution applies toward the principal and not the interest.
There are many ways to pay off your mortgage quicker. Just remember that while some solutions involve taking a short-term hit in savings, you’ll get that money back in saved costs and interest in the long term. No matter what you choose, make sure to speak to an expert at your credit union about your options.