How to Pay Off Your Mortgage Faster
Many homeowners are eager to free themselves of mortgage debt early. There are a few reasons why.
- Reduced total interest payments– Paying down your mortgage early will reduce the total interest to pay on the loan, resulting in substantial savings.
- Relief from debt– This can be more of stress relief to pay off debt than a financial strategy because it can be an emotional and mental stressor to owe money.
- Increased cash flow for retirement– Paying a home loan off early can help retirees have increased cash flow, which is particularly helpful when transitioning to a fixed income.
Paying off debt ahead of schedule is doable with a budget, extra cash, and a new payoff plan. Here are five ways homeowners can pay off their mortgage debt faster.
1. Extra Payments Each Month
Making extra payments is the most obvious way to speed up the payoff process. Here are two ways you can make additional payments:
1. Split your monthly mortgage payment in half and make bi-weekly payments.
This tactic allows you to make the equivalent of 13 months of mortgage payments instead of 12.
2. Pay more each month to pay off the principal balance faster.
This option can save you tens of thousands of dollars over the life of the loan.
This tactic of making extra payments can be better than refinancing your mortgage because it doesn’t lock you into a new payment amount. If there’s a month (or many months) when you can’t add more money to your monthly mortgage payment, you won’t be penalized for not paying extra.
Note: If you opt to make extra payments, check with your lender to ensure the payments that there isn’t an early payoff penalty. If there isn’t an early payoff penalty, confirm with your lender that the extra payments will be applied to reduce the principal rather than prepay the interest. Also, clarify that your additional payment is not a prepayment for next month.
2. Refinance Your Mortgage
Refinancing your mortgage is an option for helping with an early payoff, but only if it can lower your interest rate. It’s also important to consider that there are fees that come with refinancing. Your calculated savings need to be higher than the refinancing cost for this decision to make sense.
Refinancing from a 30-year mortgage to a 15-year mortgage can help bring down your interest rate while setting you up for an early payoff.
3. Recast Your Mortgage
Mortgage recasting differs from refinancing by allowing you to keep your existing loan and instead pay a lump sum toward the principal. The bank will then adjust your amortization schedule to reflect the new balance, which results in a shorter loan term.
The advantage of recasting over refinancing is that the fees are markedly lower as in, just a few hundred dollars. A possible disadvantage of recasting is that your interest rate stays the same, so if you have a high-interest rate, you’re stuck with it. If a high-interest rate is an issue for you, refinancing is likely the better option.
Note: VA and FHA loans cannot be recast.
4. Make Lump Sum Payments Towards Your Principal
This option allows you to make lump-sum payments to your principal whenever you’re able, rather than once and recalculating your loan term through a recasting. Making lump-sum payments is ideal for homeowners who inherit money, sell items of value, or get big job bonuses. This option is also a great alternative to recasting because it saves you from the bank fee.
Note: When making lump-sum payments, clarify with your mortgage professionals that the extra money should be put toward the principal.
5. Downsize Your House
While this might be considered a drastic step, downsizing your home can be an excellent means to get rid of your mortgage. By selling your more substantial home, you can use the profits on a smaller and less expensive home. Even if you have to get a small mortgage for the new house, you have managed to reduce your debt.
If you’re ready to pay off your mortgage faster, CIS Home Loans can help you decide which options are best for you. We are a full-service mortgage bank that’s been around since 1991 and serves customers in 49 states. Call us today at 800-844-4845 or visit our contact page to get in touch with our team.