Nearly 27 million Americans own their home outright and are free of the challenging financial burden of paying a mortgage. And, many people want to join their ranks. A 15- or 30-year loan doesn’t mean you have to take that long to repay the money. Unless the early repayment penalties are incredibly severe, paying off your house faster can free up your budget dramatically. If you want to pay off your house early, follow these steps.
1. Contact Your Lender
You don’t have to tell your lender that you want to pay off your house faster than originally planned. However, you do still need to speak with them. Some mortgage companies have specific rules about extra payments, or they may charge borrowers prepayment penalties. These penalties effectively punish you financially to make up for the interest your account won’t earn.
By reaching out, you can learn about any rules associated with your loan that may hurt your goal of paying off your house early. Plus, you can find out how you need to submit extra payments to make sure they apply to the principal balance and don’t just reduce your next monthly payment.
2. Set Up Biweekly Mortgage Payments
One of the easiest options for accelerating your mortgage repayment is to schedule biweekly mortgage payments. All you need to do is take your mortgage payment, divide it by two, and then schedule that amount to pay every two weeks.
Over a year, you end up making 26 half-payments. Not only does this add one full payment each year (13 full payments instead of 12), but it can also help you save on interest if it compounds daily.
By using biweekly payments, you could save yourself thousands of dollars. Plus, you could cut years off of the length of your loan.
For example, if you have a $200,000 30-year mortgage with a 5 percent interest rate, your monthly payment would be just under $1,074. Over the 30-year term, you’d repay the principal plus over $186,500 in interest.
However, if you make biweekly payments (about $537 every two weeks), you’d pay just shy of $151,000 in interest. That’s a savings of about $35,500. Plus, you’d shave about five years off of the loan repayment time, making you mortgage-free in around 25 years instead of 30.
3. Put All Bonuses, Raises, and Extra Cash Toward Your Mortgage
If you get bonuses, commissions, or raises at work, consider funneling that extra money toward your mortgage. While the amount you send may vary, every additional principal payment helps you pay off your mortgage faster.
For example, if your extra income is the equivalent of one extra monthly payment every three months, and you put that toward your mortgage each quarter, you can save a ton in interest and cut your total repayment time by more than half. Using the same example as above, that extra $1,074 each quarter saves you about $86,000 in interest. Plus, you’d have your $200,000 mortgage paid off in less than 13 years.
Any time you can send an extra $10, $100, or $1,000 toward your mortgage without creating a financial hardship, consider doing it. Even small amounts add up fast.
If you can only send an extra $10 a month to your mortgage, that still saves you $4,575 in interest over the course of the loan (based on the $200,000 mortgage example). It even shortens the repayment timeline by 7 months. Most people can find an extra $10 each month by doing something small, like avoiding two lattes from a coffee shop or bringing lunch to work instead of buying fast food once or twice a month.
Make the extra payment $100 a month instead of $10, and you will avoid $36,825 in interest and shorten your mortgage by 5 years. While this may require more adjustments to your budget, it can be worth the effort.
You Can Pay Off Your House Early
By following the tips above, you can pay off your house early. And the best part is, it doesn’t require much effort on your part. With a little bit of planning, you can save a ton in interest and pay your mortgage off fast, allowing you to eliminate this monthly payment from your budget as quickly as possible.
Are you striving to pay your house off early? Share your approach in the comments below.
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