Can you imagine not having a mortgage? What would you do with all that extra money each month? If you pay your mortgage off early, not only do you get to keep more month in your pocket, you could save significantly on interest payments. In fact, did you know that when you finance a home for 30 years, you actually end up paying close to twice the amount that you originally financed?
Take a house that costs $250K, for example. If you finance it over 30 years at today’s going
rates, you will pay about an additional
$180K in interest. So, a $250K home would actually cost you more like
$430K if you pay it off over 30 years.
The good news is that you can reduce this amount significantly. Using this same example, if you could pay an extra $125 each month on your mortgage, you could pay off your loan in 25 years and reduce your interest by a whopping $35K!
Freedom Financial offers these tips for anyone interested in paying off a home loan early.
1. Consider a 10-year or 15-year mortgage.
A great way to pay your mortgage off
enjoy significant savings in interest is simply to finance it for a shorter
amount of time. 10 and 15-year mortgages typically offer much lower rates, and
because the loan is paid off much quicker there is less time that interest could
accumulate. And even if you are currently in a 10 or 15-year mortgage, you
could still enjoy these savings by refinancing what you still owe into a
shorter period of time. So, if you want to eliminate your mortgage quickly,
this is the best way to do it.
However, Freedom Financial warns that before you commit to one of these types of mortgages, you make sure that you can afford it. While these mortgage loans offer substantial savings over the life of the loan, they also mean much higher monthly payments. So, do the math first before you commit. Add up all of your expenses, including things that you like to do (such as travel, eat out, etc.). And make sure you can still afford these things with the higher monthly mortgage payment. You don’t want to get into the trap of paying your other expenses with a credit card because there is not enough money left after the mortgage because that would defeat the purpose.
2. Make bi-monthly payments on your mortgage.
At the moment, committing to a shorter mortgage may seem like too much, and that is okay. According to Freedom Financial, there are other ways to pay it down sooner. A bi-monthly payment plan could allow you to pay down your loan faster, and pay less interest without committing any additional money to your payment each month. This is a great option for anyone who cannot currently afford to pay extra towards their home loan.
The way this works is that you split the amount that you owe each month on your mortgage into two separate payments. Instead of paying it all once a month, you pay half of the monthly mortgage bill about every two weeks. You can do this on your own, or to help keep you on track, ask your lender if they offer a bi-monthly mortgage plan that you could sign up for. You could end up reducing your mortgage by four years – without paying any extra towards it!
However, if you do set up this plan through your lender, check to see if they charge you to do so. Some lenders will add a fee to your loan for this service.
3. Add extra money to your mortgage payment each month.
A third way that you can pay down your mortgage is to simply pay extra each month. This allows you to do it on your own terms. And if there is a season, or month that you simply can’t afford to do so (such as during the holiday season), you are not committed to it. However, Freedom Financial does recommend that if you want to take this approach, try to stick with it.
You could set a goal, for example, to pay off your loan in 20 years versus the full 30. Determine how much extra you would need to put towards the loan each year to do so. Then divide it up over the months of the year that you can commit to paying
on it, and stick with it.
Another easy option is to round up your mortgage each month. For example, if your payment is $1450 each month, pay $1500 instead. The extra $50 is relatively easy to manage and could mean significant savings over the life of the loan. If you are on a tight budget and adding to your mortgage seems difficult, try to find ways to reduce spending in other areas. Take your lunch to work more often or clip coupons for grocery bill savings. If you have credit card debt, look for ways to eliminate it so you can apply that money to your mortgage instead.
Freedom Financial offers a variety of programs that could help you experience the freedom of living a debt-free life. Contact us today for more details.