Most mortgages have a 30 year repayment term.
This equals to paying twice the amount of your loan in interest alone.
Did you know by adding a little extra to your payment each month you can pay off your mortgage years earlier.
For example: On a $250,000 loan you will pay $179,673.77 in interest over 30 years. By adding $125 a month to your payment you’ll be paying off your mortgage 5 years sooner and you will save about $35,000 in interest alone.
In this article we will go off some of the pros and cons of paying off your mortgage loan early and provide you will some strategies to pay it off faster.
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Paying off your mortgage early or investing?
The thought of having to make payments on your home for the next few decades sounds horrible to many people.
While others look at it as a good thing, the interest rate is low and the interest paid is a tax write off can write off. They believe its better to leave your money in the stock market or mutual fund earning 5-7% interest.
If you look at the math than you can save more money by investing whatever amount you would throw at your home loan. However, its not always that simple. Paying extra towards your mortgage is kind of like a forced way to save.
What are the odds you’re going to set up an auto draft into your money market account for a few hundred dollars a month to invest more.
For a lot of people if they’re not paying a hundred extra dollars to their mortgage each month that money is going to be spent on food, entertainment, or shoes.
Setting up auto pay on your mortgage to include a little extra each month towards your principle each month is a great way to spend less money and pay off your mortgage early at the same time.
15-year & 30-year fixed-rate vs Adjustable-rate mortgages
A 15 year fixed-rate mortgage will come with a lower interest rate than a 30 year loan. However, the monthly payment can be much higher, but if you can easily afford it then its a great idea. A 10 year fixed rate mortgage will have an even lower interest rate, but the payment will be significantly higher.
Most people get a 30 year mortgage because the monthly mortgage payment is cheaper, even though the rate is slightly higher, usually about 1%.
If can afford a 15 year mortgage payment but will be cutting it tight each month. You should consider getting a 30 year loan. This way you’re not locked into the high mortgage payment. You can always pretend like you have a 15 year rate. Calculate how much extra you’ll have to add to pay it off in 15 years.
This way if anything happens and you can’t afford the payment thats ok. You just make your regular payment until you can afford to add more. And you control how much extra you throw at your mortgage.
An adjustable rate mortgage has a lower rate than most fixed-rate mortgages. A typically adjustable rate mortgage (ARM) is the 5/1 ARM. Which has an initial low rate that increases annually starting after 5 years.
The downside to an ARM is if rates go up and you can’t refinance you will be paying a giver interest rate after 5 years.
Bi-Weekly Mortgage Payments
See if your mortgage company has a bi-weekly payment plan you can sign up for. Instead of paying once a month you will be paying half your your monthly home loan amount every other week. This works out to one extra monthly mortgage payment each year. This can save 4 years of your 30 year loan term.
However, Suze Orman warns that some lenders, such as Wells Fargo make you pay to be a part of a bi-monthly payment program. Wells Fargo charges about $1100 over the life of the loan just to make an extra payment each year.
Bi-weekly payments don’t lower your mortgage payment cause the payments are being applied every two weeks instead of every month. You simply are making one extra payment per year. You can do this on your own and invest your $1100.
Throw a little extra money at your mortgage each month
While it may not be smart to throw all of your extra income towards your principle balance, adding an extra $100-$200 a month could pay off your mortgage several years faster. Use a mortgage calculator to find out how much extra you need to add to your payment to pay off your home in 15-20 years instead of 30.
For instance, my mortgage loan was for $333,000. I figured out I needed to add $875 towards my principle to have my 30 year mortgage paid off in 15 years.
While my interest rate is a little higher than it would be if i’d just refinance into a 15 year loan, I like having an option of paying a lower amount if I need to.
You can check how much you can save by paying more on your mortgage using this mortgage payoff calculator here.
Round up your mortgage payments
If you don’t have a ton of extra money to put towards your principle each month. You can just round up your payment. For instance, if your monthly payment is $1230, you would pay $1300.
This seemingly small extra payment can allow you to pay off your home loan years earlier.
Refinance your mortgage for a lower rate and/or shorter term
Refinancing your mortgage is a great idea to help you pay off your home loan as fast as possible. Even if you just refinance your 30 year loan into another 30 year loan with a lower interest rate, your payment will decrease and you’ll be paying less interest.
You should consider closing costs when refinancing your loan. If you can get a low enough interest rate then the closing costs won’t matter much. But there are situations where the savings is minimal and with the additional costs there is not a huge benefit to refinancing.
There are several types of refinancing that can help every homebuyer, even borrowers with bad credit.
FHA Streamline Refinance
An FHA streamline refinance is available to borrowers with an FHA loan. With a streamline refi you can refinance your FHA mortgage and get a lower rate.
The great thing about these types of refinances is that some lenders do not check check, or verify income. You must of closed on your mortgage at least 210 days ago to qualify.
Rate and Term Refinance
A rate and term refinance is a traditional refinance on a conventional loan. When you refinance you not only get a new rate but the term starts over. If you have 26 years remaining on your mortgage and you refinance your loan the term restarts at 30 years.
How does this help you pay off your mortgage loan faster? Well you will have a lower rate so more of your money will go towards the principle. Also, your total mortgage payment will be lower so you can continue paying the same monthly amount you were before and you will have it paid off in less than 30 years.
Get rid of PMI
Mortgage insurance adds thousands of dollars onto your mortgage loan. You’re required to have PMI if you have loan-to-value ratio above 78%. If you’re currently paying mortgage insurance you should try to add as much money to your payments so you can get rid of PMI.
If you have an FHA loan you will be paying MIP for the life of the loan in some cases. You should look into refinancing out of your FHA loan into a conventional mortgage with no PMI. FHA MIP (mortgage insurance premium) is 0.85% of the loan amount, which is almost $2,000 annually on a $200,000 loan.
If you have an FHA loan and haven’t paid off your mortgage loan to under 78% LTV yet. You could refinance into a conventional loan because PMI on conventional mortgages will be lower than MIP on FHA home loans.
Once you’re able to remove PMI on your loan you can start throwing that money at your principle balance and start paying down that loan balance even faster.
The bottom line…
Deciding if you should pay off your mortgage early or invest doesn’t have to be mutually exclusive. You can, and should do both. Unless you’re really tight on money, everyone can afford to throw a few extra dollars at their mortgage.
Even if you just round up your payments to the next hundred bucks, it still may be enough to help you pay off your mortgage a couple years quicker.
If you have high interest rates then you should definitely look into refinancing your loan into a lower rate. Even just a half a percent can save you tens of thousands of dollars on your mortgage. You should speak to an experienced loan officer to go over your refinance options.
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