Unless you need the mortgage interest deduction or plan to sell soon, it makes financial sense to pay off your mortgage early. The question many then ask though is, how can I pay off my mortgage early? Even at today’s low interest rates, the interest adds up over the life of a 30-year loan. Everything else being equal, owning a home is a good way to grow your money, but the amount of interest paid to lenders chips away at the net gains.While any realtor can talk to you about a mortgage, a great one should be able to help you understand them better.
If you’re looking at how to pay off your mortgage faster, here are a few basic things to keep in mind:
At 3.5 percent interest, over 30 years a $300,000 mortgage loan will cost close to a significant amount in interest payments. If you plan to stay in your home for any duration, making larger payments will minimize that amount. When you do sell, you’ll also realize a bigger return.
Start with the Obvious
Private mortgage insurance adds from 0.5 to 1 percent of your total mortgage amount to the payment. If your home’s value has increased and it’s at least 80 percent of the loan to value ratio, you can drop the PMI. Since the insurance is for the mortgage company, you’ll have to contact them and follow their procedures.
Options might include refinancing it, although there will be fees for that; or asking the lender to eliminate the PMI after submitting a current appraisal as proof of value. Under most conditions, homes appreciate over time. Making home improvements is another way to increase it’s value to get out from under PMI payments.
Switch the Loan Term
Refinancing to get rid of PMI early will lower your payments, and if you’re going to go through the time and expense refinancing takes, consider switching to a 15-year loan. Your payments will go up somewhat, but it’s a foolproof way to pay off the mortgage faster.
Even if you don’t need to get rid of PMI, a 15-year term cuts the amount of interest you’ll pay. Since the first years of payments on any mortgage go primarily to interest payments, the shorter loan term means that you’ll be making larger principal payments during the loan’s early years.
Committing to higher payments takes a leap of faith that could produce some anxiety. If you’re unsure, keep the mortgage you have and make higher payments for a few months to see how well you manage. It may work well, but if it doesn’t, you can go back to the existing payment amount.
Make Bigger Payments
Instead of splurging after getting a raise or a promotion, why not use the extra money to make bigger mortgage payments each month? The lender will apply any extra amount toward the amount you owe. This strategy works well as long as you don’t have high interest credit card payments or school loans. Paying off anything with a higher interest rate than your mortgage should be a priority to strengthen your financial position over the long haul.
Use Unexpected Gains
Odds are you won’t exactly win the lottery, but you might get a year-end bonus, an inheritance, a tax return, or a gift. When you apply that toward your mortgage balance, it will help you pay it down faster.
Whether you’ve already bought or simply just looking ahead, there are a number of items you need to be aware of when it comes to buying a home.