Every homeowner dreams of the day when they finally make their last mortgage payment. Unfortunately for many, they won’t see that day until they’re in their 60’s or 70’s! If you want to speed up the process by a few years, check out these tips for paying off your mortgage early.
Refinance Your Mortgage
If you want to pay off your mortgage faster, then the first thing you should do is refinance your mortgage because there’s no better time to do so. Right now, rates are at historic lows, and you might want to consider refinancing to a shorter term.
Let’s say you have a 30-year term and you refinance to a 15-year term. You’ll pay off the loan in half the time, but that doesn’t mean you’ll automatically be paying twice the amount for your monthly mortgage payment.
The additional amount you’ll be paying each month all depends on the new interest rate you can manage to lock-in. Be sure to work with a mortgage professional if you’re going to refinance. They can help you find the best rate and then you can decide if you can comfortably afford the higher monthly payments.
Even if you don’t want to increase your monthly payments by potentially hundreds of dollars a month, it’s still worth refinancing at a lower rate. With the money you’ll save on interest, you can put that towards making extra payments when you can afford it.
Make One Extra Payment Each Year
One extra payment a year doesn’t sound like much, but it can actually add up. You could end up paying off your mortgage 1-6 years early, depending on the term length.
There are two strategies you can use to reach 13 payments a year:
One option is to pay your mortgage bi-weekly–pay half the monthly total one week, and the other half two weeks later. By the end of the year, you’ll have accumulated one full extra payment. The only catch here is that not every lender will allow you to do this.
If your lender doesn’t allow bi-weekly payments or it sounds like a headache to keep up with, you can also just pay the extra in a lump sum every year.
Recast Your Mortgage
Have you recently come into a big chunk of unexpected money, like an inheritance? Then you could consider recasting your mortgage. If this is something your loan servicer will allow, they’ll take that lump sum and apply it to the principal amount of your mortgage, which in turn, will lower your monthly payments. Then, instead of paying the new, lower amount, continue paying the previous amount… but keep in mind:
You Must Specify That Extra Payments Go Towards The Principle Loan
No matter which way you decide to make extra payments, make sure you earmark that money to go towards the principal loan amount. If you don’t specify where that extra money is supposed to go, they’ll likely just apply it to next month’s interest amount.
Check for Early Payoff Penalties
Before you get too excited about paying off your mortgage earlier than your term, make sure you won’t get punished if you do! You’d think that lenders should reward you for paying them back faster, but unfortunately, they want you hanging on as long as possible so they can keep collecting interest payments.
When you pay back your loan faster, they’re losing profit and some lenders will charge you a penalty to make up for it. Depending on how big the penalty is, you could end up losing money in the long run. If your lender has a high penalty fee, you’re better off just saving that extra money and putting it towards something else.
Build Up an Emergency Fund First
Even if your lender doesn’t charge penalty fees, you should still consider whether paying off your house should be your first priority. If you don’t have a substantial emergency fund, you should definitely work on accumulating money for that before you pay-off your house. How much you should put aside depends on your finances and lifestyle, but you can use an emergency fund calculator like this one to get a better idea.
If you throw every extra penny you have at your mortgage and all your liquidity is tied up in your home, that could be a disaster if you ever run into a financial crisis and need money right away. It could take a long time for your house to sell, and if you don’t have a substantial emergency fund to keep you afloat, you might have to resort to taking out loans and charging up credit cards.
Another nightmare possibility is if the market tanks, but you have no choice but to sell. In that case, you could be losing thousands of dollars in your investment because you couldn’t afford to wait.
As this pandemic has taught us, you should expect the unexpected. If a crisis occurs, having a luxurious emergency fund will benefit you a lot more than having your house paid off.
The Time to Refinance is Now
Whether your goal is to pay off your mortgage early or not, if you can refinance your loan right now, you definitely should. Since the pandemic began, mortgage rates have been consistently trending downward. Right now, the average 30-year fixed mortgage rate is the lowest it’s been in almost 50 years!
If you want to find out if refinancing is an option for you, email us or gives us a call at (323) 412-9060.