7 Ways To Pay Down Your Mortgage More Quickly

Dated: 08/06/2015

Views: 458




Nothing can trigger that sinking feeling in the pit of your stomach faster than looking at your mortgage statement and seeing those dreaded lines: “360 payments” and “Payoff Date: 2044.” The notion of taking out a loan in your 20′s or 30′s and finishing the payoff in your 50′s or 60′s can be daunting.

But you don’t need to adhere to a 30-year schedule. According to Trulia, here are seven ways you can accelerate your repayment clock.

#1: Refinance Into a 15-Year or 20-Year Loan

Although a 30-year mortgage is considered the “normal default,” most financial institutions offer the option of taking out a 15-year or 20-year loan as an alternative. These loans are amortized on an accelerated schedule, which means that your payments will increasingly be applied to principal reduction, rather than interest.

Contrary to popular misconception, a 15-year loan isn’t double the payment of a 30-year loan. Yes, you’ll face a larger payment — but not double. Why?

Your mortgage payment consists of four factors: Principal, interest, taxes and insurance. Your property taxes and homeowner’s insurance will stay the same, regardless of the length of your loan, which means the only two variables that change will be the (remaining) principal and interest.

Each month you’ll divert a larger chunk of your immediate earnings towards your interest and principal payments. However, your total interest paid over the life of the loan will drop, for two reasons: First, you’ll be reducing principal more quickly, and second, 15-year and 20-year loans are usually granted at a lower interest rate.

#2: Make Payments As If You’ve Refinanced

But here’s the tricky follow-up question: Should you refinance? Or should you simply make extra payments as if you’ve refinanced, even if you remain on your original loan?

There are two major advantages to refinancing from a 30-year loan into a 15-year loan: You’ll be forced to make higher monthly payments (which result in a faster payoff) and you’ll enjoy a lower interest rate on your loan.

But it comes with drawbacks, as well. First, you’ll lose flexibility. If you face an emergency (like a job loss or a health crisis), you might not be able to afford the higher payments.

Second, you’ll endure another round of closing costs, which will add up to a few thousand dollars. (You can roll this into the new loan, if you don’t have the money available right now.) As a result, it will take you a few years to reach the “break-even” point: the point at which the interest savings from the new loan outpaces the transaction costs of refinancing.

If you’re already close to the end of your mortgage term, or if you’re willing-and-able to make such substantial extra payments that you can close out your current mortgage within a few years, then it may not make sense to refinance. Why not? Because you won’t hold the mortgage long enough to reach the “break-even” point.

If you’re concerned about either of these two drawbacks, forget about refinancing and concentrate on making enough extra payments to squash the rest of the loan.

#3: Refinance into a 30-Year with a Lower Interest Rate

Did you take out a mortgage loan prior to the recession, when interest rates hovered around 5 to 6 percent?

If so, then you may be missing out on an opportunity to reduce your interest rate — even if you stick with a 30-year loan.

If you have strong credit and a low debt-to-income ratio, talk to your lender about refinancing into a 30-year loan at a lower interest rate. (Ideally you’d refinance into a 15-year or 20-year loan, but if you can’t afford the higher monthly payments, then refinancing into a 30-year loan at a lower rate is a strong second choice.)

If you refinance into another 30-year loan, your monthly payments will drop, rather than increase. While this will save you interest over the life of your loan, it won’t accelerate your pay-off date. (In fact, it may extend that date even further out into the future.)

But there’s an effective work-around.

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

In other words: Plan to continue making the same monthly payment that you’re currently making. Your budget won’t change. But with your refinanced mortgage, more of that money will get applied to the principal.

#4: Challenge Your Tax Assessment

By now, you’ve contemplated several refinancing options. Let’s focus on another area of your mortgage.

Remember, your mortgage consists of four factors: principal, interest, taxes and insurance. And your property taxes are based on the value of your house, as assessed by the county.

But what if the county hasn’t valued your house correctly? Many local governments are still working with pre-recession assessment values.

If you suspect your house is overvalued, challenge your tax assessment with your county. If they rule in your favor, your tax rate will decline — which means your monthly payments will drop.

Then, continue making the same payment that you’re currently making. This “extra” money will go towards reducing your principal and interest, speeding up your payoff date.

#5: Find Cheaper Homeowners Insurance

You can probably guess where this next point is heading. The lower your homeowners insurance premiums, the less you’ll need to pay each month.

Shop around. Ask if you can bundle your car and home policy in order to take advantage of a lower rate. Request a higher deductible.

If you can lower your homeowner’s insurance premium, your monthly mortgage payment will drop. Keep making the same payment, though, so that you can siphon this difference towards accelerating your payoff date.

#6: Make BiWeekly Payments

Instead of making a monthly payment, make a biweekly mortgage payment. If your mortgage is $1000 per month, for example, make a $500 payment every two weeks.

How does this help? There are 26 “biweekly pay periods” each year, which means that you’ll effectively send one extra month’s payment to your mortgage lender every year — without “feeling” it.

#7: Monetize or Downsize

Finally, if you really want to be free of your mortgage, you could always downsize into a cheaper home. Sell your current home and use the equity to make a hefty contribution to the cost of the new one.

If that idea doesn’t appeal to you, then monetize your existing home. Rent out your guest room. Convert the basement into an apartment, and find a tenant. Build an apartment over the detached garage.

Use this income to pay down the mortgage. Yes, living with roommates can be rough — but having a fully-paid mortgage might be worth it.

Article Source: Forbes

Blog author image

Michelle Cantrell

Michelle is a native of Southwest Missouri and has twenty-five years of experience in selling real estate in the greater Springfield area! Michelle specializes in all price points, including new const....

Want to Advertise on this Site?

Latest Blog Posts

The Fall Real Estate Market Mortgage Rates Break Records

The coronavirus pandemic has remade what’s normal, and home buying is no exception. Typically, the real estate market tends to hit the brakes in the fall, as kids return to school and families

Read More

53 Best Fall Decorating Ideas To Turn Your Home Into A Seasonal Escape

53 Best Fall Decorating Ideas to Turn Your Home Into a Seasonal Escape Add cozy autumnal touches around your house with these festive and easy tips BY BLAIR DONOVAN AND REBEKAH

Read More

How Real Estate Appraisals Affect Sales

Appraisals are typically ordered by a lender, although owners can purchase a home appraisal on their own. Appraisals are done to protect the lender. An important thing to remember is that an

Read More

Why NOW Is A Great Time To Sell In SW Missouri

HOW MUCH HAVE HOME VALUES RISEN IN YOUR NEIGHBORHOOD SINCE 2000?JUNE 2, 2020 - compliments of Murney AssociatesHome prices in the Greater Springfield area are looking pretty good these days and that

Read More