Mortgages aren’t as easy to get as they were a few years ago. But even if you can’t refinance your loan there are steps you can take that will enable you to pay your loan off early and save you tens of thousands of dollars.
There are different ways you can do this, making it easier to find a way that will work in your particular situation. Find one of the five below that will be most comfortable for you.
For each example we’ll assume you have a 30 year mortgage for $200,000 at 4%, with a monthly payment of $955. Use this mortgage calculator to see how this will work for your particular situation.
Make your payment based on a 15 year loan
Some people are hesitant to take a 15 year mortgage due to the higher payment, and opt for a 30 year term instead. The difference in payment is substantial so its understandable why you’d want the longer term. But what if you take a 30 year loan but still want to pay it off in 15 years?
You still can.
You don’t have to have a 15 year loan to pay your mortgage off in 15 years”you can simply pay your 30 year loan based on a 15 year payoff.
Using the loan numbers above, by increasing your payment from $955 a month to $1,479”the monthly payment for a 15 year mortgage”you’ll not only pay your loan off in 15 years, but you’ll also save over $77,000 in interest.
Increase your monthly payments a little
If you can’t afford to make your payment based on a 15 year loan term you can still payoff your mortgage early by making smaller additional payments. You can increase your monthly payment by a flat amount that’s comfortable for you and that will still allow you to shorten the loan term.
Let’s say that you decide that you can afford to add $100 to your payment each month, increasing it from $955 to $1,055. By doing this, you can shorten your loan term by 3 years and 9 nine months, effectively reducing your loan from 30 years to 26 years and three months.
Make one extra payment each year
By making one extra payment on your mortgage each year an extra $955 based on our example you can reduce your loan term from 30 years to less than 23. You’re not increasing your monthly payment, you’re just making one extra payment each year.
Make periodic lump sum payments
Maybe you don’t like being locked into a higher monthly payment that’s fine, you can still shorten the loan term.
If instead of going the higher payment route you decide to save up your money and make a lump sum additional payment once a year or any frequency you choose you will still pay your mortgage off faster.
By making a single lump sum additional payment of $2,000 each year, you can shorten your mortgage from 30 years to less than 23 years. Seeing what lump sum payments can do to shorten your loan term can be a real incentive to pay as much as you can and pay off the mortgage even sooner.
Apply windfalls to your mortgage
Let’s say you aren’t much of a saver and you can’t afford to make higher monthly payments–there’s still a way pay your loan off early.
When ever you get a windfall, apply it toward your mortgage.
Let’s say you get a $5,000 income tax refund, and you decide to put it toward your mortgage how much would it shorten your loan term with just a single, one-time payment? One year and four months just for making a single payment in year one of the mortgage term.
What if you did the same each year let’s say the tax refund is only $3,000, but each year you faithfully used it to prepay your mortgage. You’d reduce your mortgage term by nine years and seven months.
Just by applying your tax refund to your mortgage each year not a bad deal! Instead of letting your money sit in a savings account, apply your money to your mortgage!
Is paying off your mortgage early worth the extra effort?
Imagine your life without a mortgage; you’d have more money to spend, more money to save, more money to invest more money for everything! The sooner you can make it happen the sooner you can do all those things.
Once you start thinking that way you have real incentive to make it happen. You can even combine one or more of the strategies above to make it happen even faster.
Is giving up some money now worth having extra money later?