There is a long-running debate as to whether or not you should make the effort to pay off your mortgage early. Particularly if you have a lower-rate mortgage, there’s an argument to be made that you can better use your money elsewhere, rather than paying down low-cost debt that offers deductible interest.
However, the reality is most Americans don’t want to be weighed down with the burden of a 30-year debt obligation that often runs into the hundreds of thousands of dollars. If you’re committed to freeing up your monthly cash flow and getting out of housing debt, here are a few quick ideas that can speed up the process.
Refinance Into a 15-Year Mortgage
If you can afford the switch, refinancing your 30-year mortgage into a 15-year mortgage is one of the best ways to knock out your debt in record time. Of course, if you refinance into a debt with a maturity half as long as the original one, your payments will go up by nearly double. If you don’t have the cash flow to take on that added burden, this isn’t a good option for you. However, the 15-year mortgage has a great “secret” benefit that can often make it more attractive than a 30-year mortgage.
In addition to paying off your loan in half the time, the interest rates on a 15-year mortgage are usually significantly lower than those you can get on a 30-year mortgage. For example, as of Jan. 20, the average 30-year mortgage rate hovered around 3.56%, but the 15-year rate was still way down at 2.79%. If you refinanced a $300,000 mortgage under those terms, your payment would only rise from $1,357 to $2,042 — far less than double your current payment — and you’d pay off your mortgage in half the time.
Make ‘Half Payments’ Bi-Weekly
Another popular strategy to pay off your mortgage faster is to make payments bi-weekly, rather than monthly. For example, if your mortgage is $1,200 monthly, instead of making that payment once a month, pay $600 every two weeks. In most months, you’d still make only two payments, but in two months out of the year, you’d be making an “extra” payment.
One payment every two weeks equals 26 payments per year, so effectively you’d be squeezing 13 months of payments into a 12-month period. Although the change may sting a bit at first, over time you likely won’t even notice the difference — except in how rapidly your mortgage balance declines. In fact, by making 26 payments per year instead of 24, you can cut down your 30-year mortgage by nearly five years.
Divert All Bonuses and ‘Found Money’ to Your Mortgage Payment
Probably the least painful way to pay down your mortgage faster is to divert any “found money” toward your balance. “Found money” typically refers to money that is either unexpected or outside of your normal wages, such as an annual bonus, a lottery win or an inheritance. Since you aren’t counting on using that money as part of your monthly or annual budget, it is “excess.”
Rather than using it as splurge money for a lavish vacation or another indulgence, divert that money to your mortgage balance. It’s essentially the same as making extra mortgage payments, except it has the added advantage of not coming out of your regular cash flow. This can make this strategy much less financially painful than having to carve extra mortgage payments out of your budget.
No Matter How You Slice It, There’s Only One Real Strategy
Regardless of which tip or strategy you use to pay down your mortgage faster, the only way to pull it off is to make larger payments. Swapping to a 15-year mortgage from a 30-year mortgage requires higher monthly payments; paying your mortgage bi-weekly requires two extra payments per year; and diverting your “found money” to your mortgage means you’re spending additional money that would otherwise be in your pocket. It’s all just simple mathematics. But if you’re in the financial position to put more money toward your mortgage, you might be surprised how fast you can pay it off, and how much you can save in terms of mortgage interest.
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