Mortgages are a great financial tool to help finance a home purchase. For some of our homebuyers, Frequently Asked Questions that come up are, “How can I pay my mortgage off as soon as possible? What is the best way to do this?”
For starters, living within a household budget is always prudent. Figure out how much home you can afford along with your other lifestyle expenses and stick to that budget. During the home shopping process, It will be tempting to go for a bigger, more expensive home but that can be detrimental to your budget. Living with a comfortable mortgage payment can create a sense of financial security in the event that something unexpected were to happen. Our guess is you would rather have the latter so stay disciplined to your budget and your future self will thank you.
Assuming that you are now in a mortgage that you can comfortably afford, how do you actually get it paid off faster?
Answer: Pay more than your minimum required payment. To start, put a plan in place to pay off any other debt such as credit cards, car loans, and/or student loans, that you may have so you can open up your monthly cash flow.
Once you get your other debts paid off, take whatever your monthly payment was on that debt and apply it to your mortgage. For example, let’s say you have a car loan with a payment $200/month. Once you pay off the car loan, rather than spending that money on luxuries, add it on top of your monthly mortgage payment. If you have a 30-year fixed mortgage for $300,000 at 4.75%, the extra $200/month would save you about 6.5 years of mortgage payments and about $65,000 in interest over the life of the loan.
A second strategy to payoff your mortgage more quickly is to make one extra payment each year. By making just one additional payment per year, you could shave off about four years from your mortgage. This could be done by simply sending an extra payment at some point during the year, adding 1/12 extra to each monthly payment or you can do bi-weekly payments. Rather than sending in a monthly payment, divide the monthly payment in two and send the half payment in every two weeks.
The third technique that we recommend is that you can round up your monthly mortgage payment to the nearest $100. For example, if your payment is $1,564.94, send in $1,600. The extra $35/month might not seem like a lot but it adds up over time. On a $300,000 30-year fixed mortgage at 4.75%, that extra $35/month could save you a little over a year of payments.
The fourth tactic is to increase your monthly payment by $1.00 each month. If your monthly mortgage payment is $1,000.00, make your first payment for $1,000.00 then your second payment for $1,001.00, then your third payment for $1,002.00 and so on. This is a nice, slow way to increase your payment and could reduce your 30-year fixed mortgage by as much as eight years.
If your budget is tight and you simply can not allocated more than the minimum payment to your mortgage, you can still use unexpected income to help pay down your mortgage (unexpected income can refer to tax refunds, bonuses, inheritance, etc). It may not feel like much at the time, but every little bit counts.
If you have any further questions about loan amortization or mortgages, please give us a call at 760-930-0569.