The Right Way How to Pay Off Mortgage Early | But Don’t Do This…
Is it possible how to pay off your mortgage early?
Yes, it is!
If you want to live mortgage-free and with lesser worries about your finances, there are a few things you should know before paying off your mortgage as early as you can.
There are two best ways how to pay off your mortgage early.
- Pay more money each month toward your mortgage than your monthly payment
- Refinance your mortgage to a shorter term that you currently have left on your loan
Both of these options have the least amount of risk and the greatest reward. These will cut your years left on your loan dramatically.
Instead of paying off your mortgage in 30 years, with these two options, you can cut them by 5,10, or even 15 years.
There are very risky (bad) ways to pay off your mortgage early that you should carefully consider the risks.
- Paying off your mortgage with credit cards
- Paying off your mortgage with a HELOC
- Paying off your mortgage with “infinite banking”
Is It a Good Idea to Pay Off Your Mortgage Early?
It is a good idea to pay off your mortgage early if your goal is to have some extra cash you can use for other purposes or to lower the overall interest being paid on your mortgage.
For all those months that you have your mortgage, you will be paying interest on the existing balance. When you pay off this balance early, you can get rid of years of additional interest payments on the loan.
Depending on the remaining balance on your mortgage, it can be equivalent to savings of up to thousands of dollars.
Paying off your mortgage early will also free up your monthly cash flow.
This can lessen the financial strain in the household and provide you with more resources you can save or invest, something that will give you higher returns in the future.
Paying off your mortgage will also help with your retirement as it lowers the monthly costs in your household and further stretches your retirement funds.
Paying off a portion of the mortgage can cut the total years
You don’t really need to pay off the full amount of your mortgage just so you can enjoy all its benefits.
In fact, paying one large lump sum on the loan balance can already lower the overall costs of interest and help build equity.
When you got 20% equity in the home, which means you have already paid off 20% of your loan, you could now cancel your PMI and further lower your costs every month.
PMI costs homeowners around 0.5% to 5% of the original loan balance.
If you have paid off a substantial amount of the loan, you can leverage the equity to secure the home equity line credit line or cash-out refinance.
Such mortgage options often convert the equity to cash that you can use for emergencies, tuition expenses, or renovation costs.
Even though your loan expenses may increase if you cash out equity and add one more lien on your home. This can be a helpful source of emergency funds that are way cheaper compared to unsecured personal loans.
Best Ways to Pay Off Mortgage Early
If you are a homeowner and you cannot wait for that day to be finally mortgage-free, these are the things you can do to pay down your mortgage faster:
Make an extra payment annually.
While this won’t let you pay down your mortgage in record time, it can help you do so faster. This is especially if you will do it right from the start of your mortgage.
Make biweekly payments.
This will let you save cash if the mortgage interest is being compounded on a daily basis. Here, all you need to do is make a payment every 15th and 30th of each month. Although this won’t exponentially speed up the process of paying your mortgage, this can knock off some payments from the lifetime of the loan with no need for you to apply extra money. Just don’t forget to ask your mortgage provider if they allow early payments and inquire how these are applied.
Set a target date and work from there.
Identify when you would like to finish paying off your mortgage. From there, you can calculate the extra payments you have to make every month.
Allot extra money for the balance.
If you are really motivated to pay off your mortgage, you can try to put all your extra money on the balance. If your mortgage provider lets you make several payments every month, you can put your extra cash on the loan. This extra money may come from cash gifts, bonuses, side hustles, tax refunds, and the like.
Probably the easiest and best way to pay off a mortgage early and fast is to refinance the mortgage from the traditional 30-year term into a 15-year mortgage.
By refinancing to a 15-year term, you can lower the interest rate as you make bigger payments every month. This method will let you save hundreds of thousands of dollars on interest throughout the duration of your loan.
This will also get rid of your mortgage payments sooner.
Benefits of Paying Off Mortgage Early
There are several benefits associated with paying off a mortgage early. These include the following:
Financial Security
There are people who can only sleep better once they know that they have paid off their homes. No matter what happens in their life, they no longer have to worry about having a place to live in.
Even though there are costs associated with home ownership like maintenance, insurance, and property taxes, the mortgage is still the biggest expense for most homeowners.
Once this is paid off, this one less thing to worry about.
Future income becomes free to use for other purposes
If you finished early in paying off your mortgage and your income is still the same, you can put the former mortgage payment to your savings.
You no longer have to pay interest on the borrowed principal amount and instead, you will earn interest on the money you saved. You are free to use your monthly savings any way you like.
Open a business, use it for college education, or go on trips. You get lots of options available when you pay off your mortgage early.
Enjoy savings on interest
The interest you pay during the usual fixed-rate 30-year mortgage is almost the same as the amount of the principal.
When you pay off the principal earlier, you will save more on your interest payments.
Improves credit
After you paid off this significant debt, you will have an improved credit rating that will make you qualified for more credit.
This means that you can purchase an investment property or a second home and start earning from these additional properties.
Since you don’t owe any mortgage, you will have a significant cash flow.
What Happens When You Pay Extra Principal on Mortgage?
Only a part of your mortgage payment every month goes into paying off the principal. A big part of the payment is allotted for paying the interest that continues to grow every month for as long as your loan exists. Paying extra principal on your mortgage will reduce the principal’s amount. Lowering the amount you owe will reduce the amount of the new interest that accumulates. This will also help in paying off the loan quicker. Also, when you shorten the loan’s term, there will be fewer months for the interest to accrue. Simply put, paying extra principal on mortgage will lead to substantial savings.
Should I Pay Off Mortgage Early or Invest?
You can enjoy peace of mind if you can pay down your debt and be free to reach other financial goals. This is why many people are interested to pay off their mortgage early.
However, this is not the best option all the time. For starters, you have to pay down first your credit card debt that often comes with a high interest. After that, you have to ensure that you have emergency funds you can use when the unexpected happens.
It should also be your priority to invest for retirement before making other types of investments.
Once you have done all of these and you still have some cash left after you make your regular payment for your mortgage, that is the time to consider making additional payments instead of investing.
Pay off your mortgage early if:
- You are almost nearing your retirement age.
- You have a high interest rate.
- You are a conservative investor.
Invest if:
- You are younger than 50 years old.
- You have a low mortgage rate.
- You are an aggressive investor.
- You have a 22% or higher income tax bracket.
How to Pay Off Mortgage Early without Refinancing
If you wish to pay off mortgage early without refinancing, there are several ways you can try:
Go for biweekly payments
Splitting your monthly mortgage payment into two installments creates the same effect as making an additional monthly loan payment every year. You will pay half of the mortgage payment every 2 weeks instead of making a single payment per month. It will reduce the amount of time for compounding the interest and this will reduce the total balance of your mortgage over time.
Make extra payment for the principal every month
Making an additional payment, no matter how small, can knock off years from your loan. You can choose to stop making extra payments any time or you can also increase them together with the growth of your income to allow more flexibility compared to a 15-year mortgage.
Round up your monthly payment.
Rounding up your monthly payment to the nearest $100 will let you pay off your mortgage several years early.
Refinance to a much lower rate.
It makes sense to refinance a 30-year loan if the interest rate will be lower than the current one. If the mortgage was taken out prior to the recession, chances are your rate is higher than what is available today. If you don’t like the higher payments of 20- or 15-year loans, a loan good for 30 years will have lower payments and lower interest rates.
Look for saving opportunities somewhere else in your home.
You can increase the deductible of your homeowner’s insurance to lower it and use the savings for your mortgage principal. You can also get rid of PMI or private mortgage insurance. This is the monthly premium paid by homeowners if they cannot afford a minimum of 20% down on the house.
One more way to get extra money out of your home is to convert one part an apartment you can rent out or you can also have your property listed on Airbnb when you are away. The rental income can be used to pay off your mortgage.
Risky Ways to Pay Off Your Mortgage
Pay Off Mortgage Early with HELOC
A HELOC is a type of loan that lets homeowners borrow against the equity of their home and save thousands on the interest throughout the duration of the loan.
Once applied to the mortgage, its objective is to optimize the home equity for refinancing a mortgage debt with higher interest.
Your home equity will be used as collateral which will automatically shift your debt from mortgage into a HELOC at a lower interest rate.
A HELOC is like a credit card because it also has a set credit limit depending on the home equity.
Its main advantage is that it reduces interest and mortgage payments every month and helps you pay off the mortgage faster.
Basically, what you will do here is to take money from the HELOC and use this for paying off your mortgage.
The point is to pay down the principal faster to save significant money on the interest during the period of your loan.
Pay Off Mortgage Early with Credit Card
Since the majority of lenders won’t allow you to charge your mortgage to your credit card, you need to use a third-party payment service.
Plastiq is the most popular service that lets you make payments on different bills, including your rent, student loans, and mortgage with a credit card. After you use your credit card for paying Plastiq, it will issue an electronic payment or check to your mortgage provider. Payments through debit cards are also accepted but you will not earn any rewards and you still have to pay a fee.
Despite being convenient, there are two primary stipulations associated with the third party service:
- You will pay a transaction fee of 2.5%.
- You are only allowed to use Discover or Mastercard.
Plastiq offers occasional promotions when fees are lowered. Here are a couple more pointers to know if you plan to use Plastiq to pay your mortgage:
- Credit card terms usually change.
- Payments can take as much as 8 business days.
You should only consider using your credit card to pay for your mortgage if you have plans to pay your balance every month.
As interest rates tend to be quite high, having a credit card balance typically offsets your earned rewards points. If you don’t have any available cash for paying your mortgage, it is best to contact your mortgage provider to know the options you have.
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