The reason you should pay off your mortgage early or under a smaller time frame is so that you can reduce the total cost of your finances. When you have a mortgage, you essentially have a loan that you are paying off. With any loan, there are always going to be high-interest fees, this is the same with a mortgage. Over the course of your payment, say a 30-year mortgage, most homeowners end up paying a significant amount more than they borrowed, sometimes doubling or tripling the cost of the mortgage. This is why it is beneficial to cut down the time it takes to pay off your loan.
Make Weekly Or Biweekly Payments
Due to the way that interest works, one of the ways that you can pay off your mortgage faster is through more payments on a regular basis. Interest builds each month. The way the amount is calculated is through the average amount of your loan over the course of that month, so when you make the payments at the end of the due date, the cost has not changed. By switching to more regular payments, for example, paying every week or every two weeks, the average amount of your mortgage is lowered, thus translating to a smaller interest amount. This is important since interest plays such a significant role and will be maximized with the monthly payment plan versus being reduced with weekly payment. With this strategy, you are not paying any more money than you would during the month, but cutting down the rate at which interest builds, and significantly cutting down the amount you will owe over the course of the mortgage term.
Prepayment
A way that you can reduce the amount of interest that accrues with your owed mortgages is through prepayments. If circumstances in your life or career lead you to get a large amount of money, you should put that towards your mortgage. An example of this could be a bonus from your job or a hefty tax return. Instead of using this money to splurge on a vacation or other things, you can use this towards your mortgage. You don’t even have to use all the money, but budget how you wish. Using an online mortgage calculator, you can get an accurate prediction of the total costs it would take for you to pay off your mortgage completely, which is important when evaluating your financial situation. By prepaying your monthly mortgage payments, you again reduce the interest because the total principal is lower and interest will not build as significantly. Even if you don’t stumble on a large sum of money, reorganizing your finances and bills to prioritize your mortgage payments, over early payments on your bills, for example, can help you cut down the cost and time to pay things off. As the month progresses, you can then put the money that would be otherwise used for your mortgage to other expenses, and now you have lowered interest than you would before.
Making Extra Payments
You have explored potential steps to help pay off your mortgage faster without increasing your expected monthly payments, but another extremely helpful method to help finish your home loan faster is by making extra payments. It is important to assess your financial situation to determine that you will be able to do this, and it won’t put you in any problematic situation when it comes to your money. If you have a substantial income where you are putting your money into a savings account instead, you should be trying to pay off your debts. Your money in a savings account will not make more money to cover the amount accrued by interest on your expenses like your mortgage. Aside from having some money put aside for emergencies, making extra payments will go a long way to cutting down your mortgage costs and can allow you to pay it off faster.
Refinancing Your Mortgage
One way to help you finish your home loan sooner is through refinancing your mortgage. Refinancing is usually only viable if your income changes (for the better). To ensure you’re going to be able to afford new payment terms, use a mortgage affordability calculator to estimate your monthly payment. If you cannot generate another means of income and have already taken steps to maximize your payments, you should explore other financing solutions. Refinancing your mortgage seeks out other loans and borrowing options that will offer lower interest rates or even shorter terms. This allows you to take the money from that loan and fully pay off your mortgage, then having to pay off the new loan with a lowered interest and ultimately translates to less money you are paying.
Adding Extra Income And Financial Responsibility
In order to facilitate your ability to finish your mortgage faster with extra payments, it is beneficial to have the money to do so. A source of extra income is helpful to allow you to still feel financially secure and not live on the bare minimum while being able to increase your payment amount and frequency. If you don’t want to add another job or means of income, you need to look at how you handle your money and ensure that you are being responsible in how you spend it. If you are living lavishly while in debt, be cautious because that is not necessarily a lifestyle that can be maintained as your debt further increases. Things you can easily cut down are your spending habits, whether that involves shopping, eating out, and going out. If you can do both in terms of adding another stream of income and increase your financial awareness and responsibility, you will see that cutting down your mortgage is going to be easy.
It is understandable that some people need a mortgage at longer terms because their assets or income cannot afford to buy a house outright or on a shorter term. However, not everyone is living in pay paycheck to paycheck type of situation and for those that can afford to pay off their mortgage sooner, you absolutely should be doing so. There are many ways to help you improve your mortgage and loan situation and reduce it in terms of length. This will save you more money and give you more flexibility when it comes to your finances.