Buying a home is one of the most important financial decisions you can make. After crossing your t’s and dotting your i’s, you know have a home to call your own and a mortgage for the next 15 or 30 years. While paying your mortgage on time and for the specified amount works just fine for most people, some people would prefer the freedom of knowing their home is their own – free and clear of debt – as soon as possible.
Here are eight tips to help you pay your mortgage off early so you can enjoy the freedom of owning your home.
First, is you have other high-interest debt, like credit cards or student loans, you should pay those off first. You also want to make sure you have an adequate emergency fund in your savings and be planning for your retirement. But, if you have done all that and you STILL have some extra cash lying around, then paying down your mortgage faster is a great choice.
So, how do you do it?
- Add something to every month’s payment. The advantage to extra payments is that all that money goes toward principal. Early in a mortgage, most of your regular payment goes toward interest. If you added an extra $100 to your payment of a new $100,000 30-year mortgage at 4.5 percent interest, you’d pay off the mortgage eight and a half years early and save more than $26,300 in interest.
- Make a payment every two weeks. Buy doing this, you’re effectively making a full extra payment each year. Paying half your mortgage payment every two weeks, on that same $100,000, 30-year mortgage at 4.5 percent, would cut just under 5.5 years off the term and save roughly $14,000. Splitting your mortgage payment into two pieces produces minimal savings.
- Make extra payments whenever you can. These can be small quantities, but it adds up. Start by paying $25 extra once a month, but gradually add more. For example, you could increase it to 4x a month and be paying a total of $1200 more a year by doing so.
- Make one extra payment a year. This provides about the same savings as making half a payment every two weeks. When you make the payment isn’t important. You could make it at the end of the year or wait until you get a tax refund or a bonus.
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- Refinance your mortgage to a lower rate, and keep making the higher payment. The amount this will save depends on the exact figures, but it should shave years off your mortgage and save you thousands in interest.
- Refinance your mortgage to a shorter term. This cuts the amount of interest you pay significantly as well as getting you out of debt sooner.
- Contribute funds from another source. Designate money from a bonus, odd jobs or freelance work toward paying of the mortgage. If your income is variable, rather than making regular additional payments toward principal, make one big payment when you can.
- Cut expenses and put the savings toward your mortgage. Change to a cheaper cellphone plan, cut the cable cord or otherwise cut living expenses and devote that extra money to extra mortgage payments. Living a frugal lifestyle may be difficult in the moment, but it’s worth the struggle if your ultimate goal is to be debt-free.