Buying a home is one of the most significant decisions you can make in life, and it typically helps set you on a course for financial stability.
As you sit in the title office signing an enormous amount of forms, you will inevitably see a paper that lists every payment that will be due over the life of the loan. You will also see exactly how much interest you will pay over the life of the mortgage. These numbers can be very daunting and make you wonder if you’ll ever indeed “own” your home.
But rest assured, purchasing a house is a tremendous financial milestone. Historically, real estate is practically a sure deal for making money long term, so enjoy the moment.
Once the dust has settled, and you are in your new home, you may start wondering about ways to pay down your mortgage faster. That is very doable and is a grand strategy to build your wealth even more quickly. It might feel overwhelming to find ways to add anything extra to your mortgage payment, but it is simple to do with a few tips and tricks. So, how do you do it? First, check with your lender to be sure there is no prepayment penalty. If not, then try one of the strategies below to pay down your home loan faster.
Make 13 Payments Each Year
Mortgages are typically set up to be paid monthly so that you are making 12 payments each year. Let’s say you have a $200,000 mortgage at 5% interest and are making monthly payments. If you find a way to make 13 payments in a year, the extra amount will go directly to the loan principal, rather than to the interest. This one step will take four years off the life of your loan and will save you over $32,000 in interest. It may sound like an impossible task, but try one of these methods and see how easy it can be:
- Divide your monthly mortgage amount by twelve and add that amount to each month’s payment. For example, if you have a payment due of $1500, one-twelfth of that is $125. Add that in each month, and by the end of the year, you will have made a full extra payment.
- Set up your mortgage to be paid bi-weekly. Most lenders allow you to adjust your payment schedule to a bi-weekly plan, often called an equity accelerator. With this arrangement, you pay half of the monthly amount every other week. Since there are 52 weeks in a year, by the end of the year, you will have made 26 partial payments or 13 full payments.
- Although this method requires more discipline, some homeowners set up a separate bank account. They deposit a twelfth of their mortgage payment into the account each month and then make an extra payment at the end of the year.
Make Use Of Your Extras
Did you get a tax refund? A bonus? A raise? Or maybe you’ve started a side business as a hobby, and you’re making some extra income right now. Even loose change can quickly add up. All of these dollars can go directly to your mortgage principal. Even if it doesn’t add up to a full additional payment, any time you can reduce the principal, you will shorten the life of the loan and save yourself money in interest payments.
Don’t get locked into thinking only full payments will make a difference. When it comes to paying off your mortgage faster, every little bit helps.
Create Your Own “Found” Money
If you want to get serious about paying off your mortgage faster, it’s worth taking a look at ways to cut your monthly spending so that you can apply the extra money to the loan.
Are you in the habit of grabbing takeout for dinner? Or hitting the local coffee shop every afternoon for a pick-me-up? Spending some time looking at your daily, weekly, and monthly spending habits will open your eyes to areas where you can save a lot of money. Merely bypassing takeout once or twice a week can free up several hundred dollars by the end of the month that can go straight to your mortgage principal.
Consider Refinancing Your Mortgage
If current interest rates are lower than the rate on your mortgage, and you plan to stay in your home for a while, it might be worth looking into refinancing your loan. If you can reduce your required monthly mortgage, but continue paying the amount you’ve been paying, all of that extra can go straight to the principal.
Unsure if refinancing is the right choice for you? Homes For Heroes is here to help. Contact us to learn about all your options.
Look Into A 15-Year Mortgage
A 15-year mortgage is a more extreme choice for paying off your mortgage faster, but it will help you to own your home quickly. Often, 15-year mortgages carry a lower interest rate, saving you thousands of dollars over the life of the loan. The shorter term, however, means a higher monthly payment, usually an increase of several hundred dollars per month. But if you can afford to do this, you will build equity rapidly and be well on your way to being mortgage-free.
Get Started Today
As you can see, paying down your mortgage faster is a goal that is well within reach of any homeowner. And even if you don’t plan to stay in the property long enough to own it outright, making extra mortgage payments accelerates the growth of equity you have in the home. Equity is the difference between the market value of the house and the amount owed on it. Having higher equity is helpful in many circumstances including refinancing, eliminating the cost of private mortgage insurance, applying for a home equity line of credit, and selling and making a profit on the home. Now you have the knowledge and the tools necessary to tackle that mortgage and to put yourself on a solid financial footing.