You took out a 30-year loan because it seemed like a good idea at the time. You wanted to keep your monthly payments as small as possible. That’s what many new homeowners do, especially if they’ve never had a mortgage before.
Now that you are established in the home and have a grasp on your financial future, you want to know how you can pay that loan off faster. If 30 years seems too far off to own your home free and clear, use the following tips to pay your 30-year loan off faster.
Make an Extra Payment Each Year
If you can afford to make one extra lump sum payment each year, make it equal to your principal and interest payment. This way you make 13 mortgage payments per year rather than 12 payments. This one extra payment can knock a few years off your loan. It will also decrease the amount of interest you pay on the loan, since you’ll pay the balance off faster.
Make an Extra Payment Each Month
If you would rather make smaller, extra payments, you can pay extra towards your principal each month. Let’s say you can afford an extra $100 each month. That would come out to an extra $1,200 each year towards your mortgage. While it doesn’t seem like a lot, after just five years, you would knock off $6,000. If you do this consistently, you may knock a few years off the term of your loan.
Make Bi-Weekly Payments
Some mortgage companies offer a service that helps you make bi-weekly payments. It’s not necessary to pay for that service, though; you can do it on your own. Simply take your full mortgage payment and divide it by 2. You then make that payment every other week. This is in place of your monthly mortgage payment.
When you pay your mortgage every two weeks, you make 26 mortgage payments, which equal 13 months of payments. Without even realizing it, you just made one extra mortgage payment each year. This is possible because there are 52 weeks in a year, which translates into 13 months, but because some months have more than 4 weeks in them, you don’t make that 13th payment on a regular schedule.
Apply Your Windfalls
If you receive any type of lump sum money, such as tax refunds, work bonuses, or commissions, consider applying them to your mortgage. If it’s money you don’t count on for living expenses and truly is ‘extra money,’ you can use it to pay that 30-year mortgage down faster.
If your windfall is large enough, it could knock many years off your loan balance. Even if you don’t get large lump sum windfalls, but get several smaller ones, applying them towards your mortgage will help you reach your goal of paying the loan off faster.
Make 15-Year Payments
If you wish you had taken out a 15-year term rather than a 30-year term once you own the home, you can still get the benefit of the 15-year term. Using a mortgage calculator, determine the amount of your 15-year payment. You can then make that payment each month, applying the extra money towards the principal balance.
The nice thing about making voluntary 15-year payments is that you can go back to the minimum 30-year required payment if the going gets tough. Let’s say you had to stop working for a few months because of an injury. You might want to cut back on your mortgage payment during that time. Since you didn’t officially refinance into a 30-year term, you can do this. If you had refinanced, though, you’d be stuck with the 15-year required payment.
Combining Several Methods
You can also take several of the above methods and combine them together to get your loan paid off the fastest. For example, if you receive tax refunds each year of several thousand dollars and you make one extra mortgage payment each year, you could knock many years off your loan. The quicker you pay the principal balance down, the less interest you pay, and the faster you own the home free and clear.
The key to paying your mortgage off faster is consistency. Pick a method or methods and stick with it. Of course, if it gets too hard to make the extra payments, you can cut back. But, if you are able to afford it, stay consistent. Also, don’t refinance your loan into another 30-year term. If you do choose to refinance, make sure the term is either equal to or less than the amount of time you have left on your current loan. Resetting your loan term back to 30-years would just start you back at square one, which is what you want to avoid.Click to See the Latest Mortgage Rates»