Who wouldn’t want to pay off their mortgage faster? The big question is “how do I do it?”
Whether to pay off your mortgage faster, is an important personal financial decision.
But before one can answer “how do I do it,” you must first ask the questions of “can I do it” and “why should I do it.”
The can-I part reveals if one has the financial ability to put more money aside for bigger and quicker payments. The why-should-I part involves whether to use the additional money available, alternatively, for investing or consumption purposes since funds borrowed under mortgage probably have a lower interest rate than say credit card debt.
Paying off a mortgage faster also has tax implications on mortgage interest deduction.
If one has the financial means; is willing to forgo any investment opportunity; is prepared to postpone any would-be nice consumption; and has weighed on any tax savings, there are ways that one can consider to pay off a mortgage faster.
Understand the Mechanism of Paying Off a Mortgage
A mortgage is paid off through a mortgage amortization process over the life of the loan in which each payment is first applied to interest accrued during the current payment period and then to reducing the outstanding principle amount.
At the end of a normal payment schedule of a 30-year mortgage, the total amount of accumulated mortgage interests would have always surpassed the initial principle of the loan, if the mortgage interest rate used is above 5.304% (calculation omitted). Even if your rate is lower you can expect the total amount you pay to be close to double your mortgaged amount.
It’s quite a sobering thing to see the total amount of the loan being double what you are borrowing!
Therefore, paying off your mortgage faster essentially saves the borrower from having to pay such a monstrous amount of interest.
Anything can reduce the outstanding principle at any given point, either by making bigger payments from time to time or more frequent payments in addition to regularly scheduled. The goal is to accrue less interest in between payments, as well as reduce the total time during which interests are accrued.
Ways to Payoff Your Mortgage Faster
1 – Increase Monthly Payments
Increasing the amount you pay at originally scheduled payment points whenever you can is something very easy to implement with your lender.
Your extra mortgage payment amount would be applied towards further reducing your outstanding principle and thus a less amount of money would be accruing interest.
Make sure you lender knows that the extra payment will go towards reducing the principle!
What can happen in some cases, is the extra amount you pay will go towards your next payment due rather than the principle. This doesn’t help you pay down your principle faster.
2 – Increase Payment Schedule
The normal monthly mortgage payments can be re-scheduled to be on a biweekly basis or even weekly if your financial situation allows. But how frequent the interest compounds should remain on the conventional monthly basis and not to be accelerated by your lender.
More frequent payments help lower the principle amount at their comparing time points.
3 – Change Your Loan to a Shorter Term
If you can really commit to making increased payments on a regular basis, shortening a 30-year mortgage to a 15-year loan would also save you about half of the interest and probably is the fastest way you could pay off your mortgage.
You could also pay extra in such a way that the payments you make would be what you would pay if you had a 15 year loan.
Use an online mortgage calculator to figure what your monthly mortgage would be if it were a 15 year rather than a 30 year and use that amount to pay monthly. You’ve basically just created a 15 year loan that gives you some cushion if some months you can’t make the higher payment, as you have the 30 year payment to fall back on.
4 – Refinance to a Lower Interest Rate Loan
With a lower interest rate, due to mortgage refinancing, the required monthly mortgage payments would be also lower and if you could maintain the same level of payments as before (with the higher rate), that would be equal to increasing monthly payments, and –BOOM!– pay off your mortgage faster.
We refinanced our mortgage not long ago and it’s saving us roughly $200 a month or $2,400 a year. That’s already more than a month in extra payments a year if we keep paying our original payment.
Time is on the side of the banks with a mortgage.
What looks like a low rate could add up to hundreds of thousands over the course of thirty years in interest for the bank (and money out of your pocket). Reducing the amount you owe on your principle can save you a ton of money that you could use elsewhere to build wealth.
Paying down your mortgage faster will save you far more over the life of your mortgage than most coupon cutting can achieve.