Personal finance guru Suze Orman has a cornucopia of helpful advice. Among her tips, she suggests paying off your mortgage by the time you retire.
Whether you have a 15- or 30-year mortgage, here’s Orman’s advice for paying down your mortgage faster.
Why Should You Pay Off Your Mortgage as Quickly as Possible?
Putting extra money toward your mortgage might seem like a financial hardship. After all, your mortgage loan is set up to pay out within 15 or 30 years — all you have to do is make the required payments in full and on time. Plus, isn’t it better to invest or save any extra money you have in your budget?
In certain instances, Orman said, the answer is no. “Don’t you want to feel safe in these seriously uncertain times — uncertain times about inflation, uncertain times about what the markets are doing, uncertain times about everything?” Orman asked in her February 2022 podcast. “The best way you can put certainty in your life is to own your home outright by the time you retire.”
Orman said she doesn’t recommend this strategy if you’re 35 and know you’re going to move in three or four years. But she does believe that if you are older and your goal is to gain financial security and safety, paying off your mortgage as quickly as possible is a wise idea.
“Paying more on your mortgage could help you earn equity faster, reduce the total interest you’ll pay over the life of the loan and, ultimately, allow you to repay your mortgage more quickly,” said Felton Ellington, community lending manager at Chase. “That’s because making payments directly to the principal reduces the total amount of interest paid because interest is calculated as a percentage of the principal. Typically, the lower the principal, the less interest owed.”
Orman’s Advice for Paying Down Your Mortgage Faster
Here’s what you need to do to make your mortgage payments history, according to Orman.
Consider the Loan’s Interest Rate
The lower your loan’s interest rate, the faster you can potentially pay it off. However, if you’re thinking about refinancing to get a lower rate, Orman said to proceed with caution.
“The big mistake is that after spending years paying down their existing 30-year mortgage, people then refinance into a new 30-year mortgage,” Orman once wrote on her blog. “This is so very wrong. … My rule of refinancing is that you are to never extend your total payback period past 30 years.”
Orman explained that if you have a 30-year mortgage and you’ve already made payments for 14 years, you should make it a point to get a refinanced mortgage paid off in 16 years. Otherwise, if you refinance for another 30 years, you’ll end up paying for your mortgage with interest for 44 years in total.
However, Orman pointed out that mortgage lenders typically make loans for 15 or 30 years. So you’ll still have to apply for a 15-year mortgage if you refinance. Orman said to look at the amortization schedule to find out how much extra you’ll need to pay every month to have the loan paid off in 14 years.
Make Extra Payments
Once you have the lowest interest rate possible, you can start making extra payments. In a September 2022 podcast, Orman said you can make one extra payment a year to help pay your mortgage down faster — either by making biweekly payments or by dividing your regular payment by 12 and adding that amount to each payment.
By making one extra mortgage payment a month, you can reduce your 30-year mortgage down to maybe 27 years and a 15-year mortgage at a 6% interest rate down to 12 years, Orman estimated.
However, it’s important to tell your lender that you want the extra money to go toward the mortgage principal. Otherwise your goal of paying off your loan faster and saving on interest won’t come to fruition. “So just make sure if you send in extra money it goes towards your principal and not towards interest,” Orman said.
Recast Your Mortgage
Another option is a mortgage recast.
“You can ask your lender about a recast option, which allows you to apply additional money each year to the course of your monthly payments,” said Ray Rodriguez, regional mortgage sales manager at TD Bank in New York City. “This will allow you to get a lower principal balance on the year’s payments. A recast allows a borrower to pay off their mortgage earlier, while lowering the cost of each monthly payment.”
In an October 2021 podcast, Orman said a lot of banks will recast your mortgage for free or for just a few hundred dollars. Plus, you’ll get to keep the same interest rate.
“Recasting is where you simply take a minimum of $5,000 — some banks require $20,000 … and you put it into the account, and you recast the mortgage with your mortgage company, which means they reduce the principle that you owe and they give you a new amortization schedule based on the lower principal amount,” Orman said, adding that recasting could drop a $2,800 monthly mortgage payment down to $1,800 or so.
“So, that frees up $800, $1,000 a month,” she said. “If you didn’t need that extra $800 or $1,000 a month or any portion of it … and sent that in to your principal as well, … it would reduce the length of your loan. So that is one way that you could absolutely get rid of your mortgage faster than you have any idea.”
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