For homeowners, mortgage payments are usually the largest item in a household budget. Have you ever thought how much your life could change if you were able to eliminate that expense? You might wonder if paying your home off early is something that is advisable to do at all. Some financial advisers recommend paying on time and using the extra cash for other investments. After all, mortgage rates are relatively low compared to the interest you can earn in a good mutual fund. But that does not account for risk; there’s no peace of mind like owning your home outright. Here are four tips for paying off your home loan early.
Double the Initial Principle
Let’s say you have a $100,000 loan with a 30-year term at 6% interest. Your monthly payment will be $600, but only $100 of that will be going toward the principle and the rest to interest. If you simply add an extra $100 to your payment each month, you’ll pay the loan off 9 years early, and save almost $40,000 in interest!
Pay Bi-Weekly Instead of Monthly
In the scenario above, suppose you paid $300 every two weeks instead of $600 every month? In effect, you’d be making 13 monthly payments instead of 12. This would save over $25,000 in interest and pay it off 5 years and 7 months early.
Use a Portion of Your Savings Account
At the end of each year, take 20% of your personal savings account and apply it to your mortgage. You’ll still have 80% of your savings left to use for emergencies, and you’ll be even closer to eliminating your debt. Of course, this plan entirely depends on you actively keeping a savings account. If you only have $500 at the end of the year in your savings, then 20% isn’t going to get you too far. However, if you are saving a few hundred dollars every month, then this plan will work. Just know that a plan like this isn’t meant to substitute any other plan, but is meant more so to be in addition to them.
Refinance to a Shorter Term
The other three tips have one particular problem in common: they rely on you to be diligent about paying extra on your own! Unless you are disciplined, it can be easy to talk yourself out of it and divert that money to things that you don’t really need or may think you need in the moment. However, if you refinance through a mortgage company like Republic State Mortgage Co, the extra payments become part of the contract. Depending on your credit score and total debt, this option could also make it so that you end up paying less of the interest in the end. You could even do this and one or two of the above tips as well. It all just depends on your personal financial situation.
By applying these tips, you’ll be closer to your zero debt goal. Paying more than your mortgage currently calls for might not be easy, but having no payment at all in the end will be completely worth it!