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How To: Pay Off Your Mortgage Faster

What images does the year 2044 bring to you? Hover crafts...discovery of life on Mars...your mortgage payoff date? Taking out a 30-year mortgage can feel daunting, but not to worry, there are other options!

You don't have to choose, or adhere to, a 30-year repayment schedule. Here are a few smart ways to pay down your mortgage more quickly.

 

1. Refinance into a 15 or 20 year mortgage.

Typically, a 30-year mortgage is the default schedule most home buyers choose, but it is not your only option. Choosing a 15 or 20 year schedule instead will mean that a larger portion of your monthly payments will be applied directly toward the principal of your loan instead of interest.

Don't fall into the trap of believing that a 15 year mortgage will DOUBLE your monthly payments. That is not the case. Your payment WILL be larger, but it will not be twice as much. Here's why- your mortgage payment is applied to 4 different things: Principal, Interest, Taxes and Insurance. Your property taxes and insurance will remain the same regardless of the length of your loan. The only variables are the principal and interest.

By accelerating your schedule, a larger portion of your payment will go toward the interest and principal. While your monthly payments therefore will be higher, the amount of interest you pay over the life of the loan will be substantially because 1) you will be paying down the principal more quickly and 2) 15 and 20-year loans are usually granted at a lower interest rate.

2. Increase your payments as though you've refinanced.

Refinancing is not going to be an ideal solution for every homeowner. The obvious advantages to refinancing to a 15 or 20 year mortgage include being forced to pay down the principal faster (due to making larger monthly payments), and lower interest rates on the loan.

There are drawbacks to refinancing though. You'll have less flexibility for making payments if some extenuating circumstance such as medical bills or a job loss occur. You'll also have to pay a second round of closing costs, which could be a few thousand dollars. If you aren't able to pay the closing costs up front, they will be lumped into the refinanced loan. As a result, you will be also be making payments toward those closing costs in addition to the principal and interest of your loan for several years before reaching the "break even" point when refinancing will save you interest money.

If you're nearing the end of your mortgage, or are financially able to make larger payments to close the loan out within a few years, refinancing will not make sense for you as you'll never reach the "break even" point.

If you are concerned about the lack of financial forgiveness associated with refinancing, or feel that you could pay down the mortgage within a few years, don't refinance. Instead, focus on making larger monthly payments to pay down the loan faster while maintaining your flexibility.

3. Refinance for the same time frame at a lower rate.

If you are currently paying a higher interest rate than what is being offered to new home buyers, you may be missing an opportunity to refinance at a lower rate--even if you keep the 30-year term.

If you have solid credit and a low debt-to-income ratio, contact your lender about refinancing at a lower rate. If you are able, refinancing to a 15 or 20-year loan is ideal, but if you are not, a 30-year loan at a lower interest rate is still a great option.

Refinancing to a 30-year mortgage at a lower interest rate will actually decrease your monthly payments and could possibly extend your payoff date. However, it is smart to continue making the same payments you were at the higher interest rate to allow the extra monthly payment to go toward your principal. This way you'll be paying off far less interest through the life of the loan and shortening the overall payoff time!

4. Research cheaper Homeowners Insurance.

By reducing your insurance premiums, you will also lower your monthly mortgage payments (remember that insurance is one of the 4 parts of a mortgage payment).

Can you bundle your home and auto insurance? Can you increase your deductible? Both will help lower your premium.

If you are able to lower your insurance payments, your monthly mortgage payment will drop as well, but continue to make the same payment to decrease your principal more rapidly and expedite your payoff date.

5. Monetize or downsize.

If you are in a hurry to be free from your mortgage, you could consider downsizing to a less expensive home. You could use the proceeds from your sale toward the purchase of a new home and finance a much smaller portion.

That option will not appeal to everyone. You could also consider renting out a room or converting your basement, or space above a garage, into an apartment for extra income.  Having extra "roommates" is not necessarily ideal, but having a fully paid mortgage could be worth the short-term hassle.

 

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