Filed under: Mortgages, Home Buying, Home Loans
By Marilyn Lewis
Chances are your home mortgage is the largest debt you'll ever have. How would you like to pay it off and run your mortgage contract through the shredder a lot faster than the 30 years most homeowners sign up for? Let's consider some ways to painlessly pay off your home loan sooner. You can choose to do it a little faster or a lot. In some cases, you'll scarcely notice the added expense.
1. Make Biweekly Mortgage Payments
Since there are 12 months in a year, homeowners make 12 monthly mortgage payments. But if you make half-sized payments every two weeks (biweekly), you'll make 26 half payments, the equivalent of 13 full payments, essentially making 13 monthly payments every year rather than the usual 12.
To go this route, call your lender and ask the best way to do it. Some lenders will set you up with biweekly payments. Or you might simply prefer to send in the extra payments by mail or electronically. Whenever you make any extra payment, however, be sure to designate it "apply to principal." Otherwise, the lender may treat the extra as a prepayment of your next regular monthly payment.
Use a calculator like this one from the Mortgage Professor to see your savings. Example: According to this calculator, if you have a 30-year fixed rate mortgage at 3.8 percent, making biweekly payments would save $20,573 in interest over the life of the loan and pay off your mortgage four years earlier. That's a big bang for not many extra bucks.
One thing to avoid: "mortgage acceleration" products and plans. Paying down your mortgage is an easy thing to do, and you shouldn't have to pay anything to do it. No expertise or pipeline to a higher authority is required. When you see ads and pitches for mortgage "acceleration" plans, programs and products, run the other direction. (Learn more about these gimmicks here.)
2. Pour Every Bit of Extra Cash Into Your Mortgage
Dedicate every bonus, raise and windfall, birthday, holiday and graduation gift you receive toward paying down debt. Obviously, the highest interest debt takes priority, but if you have an adequate emergency savings fund and your mortgage is your only debt, when extra money falls into your hands, don't even ask yourself what you'll do with it: Add it to your mortgage payment, designating it as additional principal.
It's possible you'll find better uses for extra cash than paying down your mortgage. For example, if your mortgage rate is 3.8 percent, but you can earn 5 percent on your money elsewhere, you're obviously going to be better off earning the 5 percent. Read Stacy's discussion about the pros and cons of using extra cash to pay down your mortgage.
3. Round Up Your Payments
The monthly payment on a $200,000 mortgage at 3.8-percent fixed over 30 years is about $932 a month. Get into the habit of rounding up that amount to $1,000. Or even $1,030, or $1,050. Do it on a regular basis, and you'll shave years off your mortgage while feeling little pain.
4. Make One Extra Payment a Year
Give yourself a holiday gift by making an extra payment at the end of the year -- or any time. Or, if you'd rather, add an amount equal to one-twelfth of your mortgage payment to each month's payment. For instance, with the $932 monthly payments in the example above, one-twelfth is $78. Add that to your normal payment, for a total payment of $1,010, and you'll shave 30 payments off a 30-year mortgage, paying it off in 26 years instead of 30.
5. Refinance Into a Shorter Loan
Nearly 90 percent of Americans who financed their homes in 2013 chose a 30-year fixed rate mortgage, according to Freddie Mac. One reason to do so: Monthly payments are lower on longer-term loans.
Only 8 percent chose 15-year loans in 2013. But those borrowers stood to save a lot of money over the long haul. You can, too, with a shorter duration mortgage. Follow these three steps to find out what you would save:
- Find current mortgage rates. A good general source is the Freddie Mac weekly mortgage market survey, updated every Thursday, but you can also look at real-life rates available in your area by visiting the Money Talks News mortgage search page.
- Decide if you want a fixed or adjustable rate mortgage. ARMs are typically cheaper but riskier. Here's how to decide if an ARM is right for you.
- See what you could save. Use HSH's amortizing mortgage calculator (choose "show the full table") to compare the costs and benefits of various options.
Reducing the term, or duration, of the loan usually saves money in two ways: You pay less total interest, and you often get a lower rate. When I researched this story, the average 30-year fixed mortgage rate was 3.8 percent. The average 15-year, fixed rate mortgage had an average interest rate of just 3.07 percent. The monthly payments on a $200,000 loan would be $1,388, which is $457 higher than the 30-year version. But you'd be done in half the time, paying only $49,823 in interest, instead of $135,489. That means you'd keep nearly $86,000 in your pocket rather than putting it in a lender's.
If you want to shorten your mortgage's term but 10 or 15 years feels too tight, the payments on a 20-year loan might be more comfortable.
6. Refinance and Just Pretend It's a Shorter Loan
If locking into a shorter mortgage with higher monthly payments feels scary (what if you hit a rough patch and need the money?), you can get much the same effect by refinancing - if rates are low enough to justify it -- into a cheaper 30-year mortgage but paying it off on a 15-year (or 10-year or 20-year) schedule.
You won't enjoy any lower rates offered for shorter-term loans, but you'll save heaps of money on interest. To stick with our sample mortgage, the new payment on your $200,000 (3.8 percent, 30-year fixed-rate) mortgage is $932. Go ahead and pretend you're on a shorter schedule. Your monthly payment would be:
- $1,190 to pay it off in 20 years.
- $1,459 to pay it off in 15 years.
- $2,006 to pay it off in 10 years.
Is Refinancing Cost-Effective?
The last two options involve refinancing your home. Before considering them, decide if refinancing is a good move for you. Whether refinancing is worth it depends on the associated costs and how long you'll stay in the home. To be a good deal, you'll need to stay long enough to more than recoup your costs. Refinancing is loaded with costs, including, but not limited to:
- A lender's origination fee.
- A title search fee and title insurance.
- Taxes.
- A settlement professional's fees.
- The cost of pulling your credit report.
- An appraisal fee.
- State or county tax and/or transfer fees.
Estimate Your Costs to Refinance
On average, homebuyers paid an average of $2,539 in closing costs for a $200,000 mortgage in 2014, according to Bankrate's annual survey. The cost of refinancing is similar. Here's rule of thumb: Expect to pay 2 percent to 5 percent of the loan amount to refinance, says Zillow.
Estimate your own costs using MyFICO's refinance calculator. Also, you can shop around by telling several mortgage lenders how much you want to borrow and asking for their estimates of fees. Again, the Money Talks News mortgage search tool is a good place to start. Don't give lenders consent to pull your credit until you're ready to actually apply for a loan.
What's your approach to paying your mortgage? Are you trying to pay it off faster? Tell us how that's working by posting a comment below or at Money Talks News' Facebook page. Like this article? Sign up for our newsletter and we'll send you a regular digest of our newest stories, full of money saving tips and advice, free! We'll also email you a PDF of Stacy Johnson's "205 Ways to Save Money" as soon as you've subscribed. It's full of great tips that'll help you save a ton of extra cash.
