It comes every month, like clockwork. Your mortgage loan payment. Whether you have it deducted automatically or you get a bill in the mail, there it is. Taunting you. Only 268 more payments to go – or something like that.
Tired of the monthly grind? You’re not alone. Here’s how to get rid of that mortgage, pronto.
The Simple Way To Pay Down Your Mortgage
Send extra monthly payments to your lender. Professional real estate agent Deborah Beran sometimes recommends this to new homeowners as a way to accelerate a mortgage. It’s a reliable and proven way to pay down your debt fast.
Figure out how much extra you can pay against the mortgage, and just keep sending the lender money. Before you know it, your home will be paid off in full.
How To Use Windfalls To Accelerate Payments
If you can’t afford to send much (or any) extra money to your debts, you might benefit from using windfall payments. What are windfalls? These are things like tax refunds and other lump sum payments you might receive.
Applying windfalls to your mortgage will take a huge chunk out of the principal, and may end up saving you thousands of dollars in interest payments.
How To Employ A Refi “Hack” To Accelerate The Payoff
A clever way to save money on your mortgage is to refinance it periodically. If you’re paying down your mortgage by setting aside additional money, then refinancing can work for you. Because your principal is much lower than it otherwise would be, refinancing your loan will have the effect of making your loan smaller, thus reducing the interest.
For example, if you take out a loan for $250,000 at 4 percent, The total cost of your mortgage will be $429,674. Your monthly payment will be $1,194. But, let’s say you’ve whittled that down to $100,000. Your payments under the original loan agreement are still $1,194 and your total cost is still $429,674.
But if you refinance the loan when the principal is $100,000, the loan now is only going to be for $100,000. That means, at the same interest rate, your total cost has dropped to $171,870. Your monthly payment is $477. You just freed up $717 which can be applied to the loan balance to accelerate the mortgage further.
Using Bi-Weekly Payments
A popular method promoted by some banks, and debt management firms, is bi-weekly payments. Basically, this method involves making payments twice a month instead of once per month. Why does this work?
Because there are 25 biweekly periods in a year. That means that if you make half of your monthly payment every 2 weeks, you end up making 13 full payments – one extra payment per year.
It’s a variation on sending extra money to your lender. What you’re really doing is paying down the loan principal more quickly.
Variable Rate Hack
If you have a fixed rate loan, consider switching to a variable rate. Why? Because variable rates tend to be cheaper, lenders tend not to assess as many points on them, and you’ll walk away paying less interest at the end of the loan.
The Savings Hack
Yet another way is to not pay off your mortgage loan at all – at least not directly. It might sound counterintuitive, but setting aside money in a conservative investment, or a high-yield savings, can help you accelerate the payoff of your debt.
Because sending additional monthly payments to your lender only pays down the principal. It doesn’t reduce the interest directly. In that sense, it doesn’t really matter whether you pay off your mortgage in one lump sum or over time by making additional monthly payments.
Then, why create a “side fund?” Because it gives you liquidity between now and the time you want to have your mortgage paid off in full.
Let’s say you could pay off your mortgage in full in 10 years. You could do that by saving money on the side each month and then making one lump sum payment at the end of 10 years. Or, you could make an extra monthly payment each month and do it that way.
Either way, mathematically, you pay off the debt in 10 years and pay the same amount of interest. The difference is the liquidity. If you save money on the side for 10 years, and then pay off the loan in one fell swoop, you’ll have a cash savings in the meantime that can help provide financial security.
If, for some reason, you can’t make your monthly payments (because you lose your job, for example, or you experience a temporary cut in your hours), then you have money to keep making the normal monthly payment so your loan doesn’t go into default.
It’s a defensive strategy, and one that many people adopt because they don’t know what the future holds.
Deborah Beran is an Associate Broker with extensive experience with luxury waterfront properties in the Smith Mountain Lake, VA real estate market. Deb has earned multiple real estate designations including Graduate Realtor Institute (GRI) and Certified Luxury Home Marketing Specialist (CLHMS). She has worked with both buyers and sellers in the unique lake home market for more than 20 years.