How to pay off your mortgage early

bullseyeHow to pay off your mortgage early

Becoming a homeowner is a great feeling for many people, 
but that feeling of elation often dissipates when the first mortgage payment comes due. Although most responsible buyers shouldn’t be surprised at the amount of that first mortgage payment, 
that first bill can still catch someone off guard.

Though the apprehension over mortgage payments may wear off once homeowners get settled, that doesn’t mean homeowners don’t wish they could pay off their homes before those mortgages reach maturity. Though it might seem impossible in those first few months after buying a home, paying a mortgage off early can be accomplished in a variety of ways.

Increase what you pay each month.
Any type of loan, be it a traditional credit card or a mortgage, will disappear faster when borrowers pay more than the bare minimum. By paying just a little more each month, more of your money is going to the principal on the loan, lowering the amount of interest you will pay over the life of the loan at the same time. For example, a $200,000 30-year mortgage loan at 7 percent interest will cost borrowers $1,330.60 per month (costs may vary depending on taxes), and that loan will be paid off in 30 years. But borrowers who increase their payments by just $50 per month can pay off the loan in 26 years and nine months. What’s more, borrowers who only make the minimum payment each month will have paid $279,017.80 in interest charges over the life of the loan, while those who increase each month’s payment by just $50 will have paid just $242,588.80 in interest over the life of the loan. That means that extra $50 per month saves borrowers $36,249 in interest charges.
One thing borrowers must be certain of is that any extra money they send in each month is applied to the loan’s principal, and not just set aside for the next month’s payment. Talk to your lender to verify this, and when doing so, make sure you don’t have to pay any prepayment penalties if you do, in fact, pay the mortgage off before it reaches full maturity. Such penalties can be significant, but they might be worth paying for the peace of mind of knowing you will be paying your mortgage off several years early.

Consider bi-weekly payments.
Bi-weekly payments, in which borrowers make half-payments every two weeks instead of one full payment once per month, are another way to pay your mortgage off early. A typical mortgage agreement has borrowers making payments once per month, meaning they are making 12 annual payments. But a bi-weekly payment system takes advantage of the fact that there are 52 weeks in a year. So by the end of one calender year, you will have made 26 half-payments, or 13 full payments. Such a payment system enables some borrowers to pay off their 30-year mortgages in as little as 24 years.
When looking into bi-weekly payments, consult your lender to determine if there are any penalties to such a system. Some lending institutions charge customers who change their payment structure. In addition, confirm with your lender that each extra payment is going toward the principal and not toward your first payment next year.

Refinance your loan.
Refinancing to a shorter-term loan often earns borrowers a smaller interest rate, which can offset the higher monthly payments that accompany shorter-term loans. A shorter-term loan means you won’t have mortgage payments hanging over your head for as long as you would on a 30-year mortgage, and it also means you won’t pay nearly as much in interest over the life of the loan. Many homeowners find a 15-year mortgage forces them to be more disciplined. Homeowners who find their 30-year monthly mortgage payment is well below their means should consider a shorter-term loan, especially if their 30-year mortgage would penalize them for paying the loan off before it reaches full maturity.

Mortgage payments have a way of dominating homeowners’ thoughts. But those homeowners who want to get out from under their mortgage payments without selling their homes have a handful of options at their disposal.