Live Mortgage-Free!

Just because your loan term is fixed doesn’t mean that you have to wait for that period of time to be mortgage-free. There are some strategies that you can use to speed up the process.

We all know that a lot can happen in 30 years. Infants become adults, jobs change, neighborhoods change, your financial situation may change. Change during such a long period of time is inevitable. But if you’re a homeowner, there’s one thing that won’t change – and that’s your obligation to make a monthly mortgage payment. The good news is that a loan term doesn’t have to dictate when you liberate yourself from this financial commitment. There are a few proven ways to cut the ties early while actually lowering the total amount paid in the process.

MAKE HIGHER PRINCIPAL PAYMENTS

Even small additional payments towards the principal can add up over time. On a $150,000 loan for 30 years at 3.75%, with no additional payments, more than $100,000 will be paid in interest over the course of the loan. By adding just $100 per month in principal payments, the total interest paid is reduced by almost $25,000 and the loan will be paid off more than six years sooner!

PUT WINDFALLS TO WORK

Maybe there’s not much room in the budget to make higher payments or to pay closing costs for refinancing. Never fear! Tax returns, bonus checks, and inheritance payments present the opportunity to pay off a chunk of your mortgage without feeling the pain in your monthly budget. This could mean thousands of additional dollars chipping away at this massive financial responsibility each year. If wiping out your mortgage early is a priority, this is a great place to start.

GET RID OF PRIVATE MORTGAGE INSURANCE (PMI)

If you financed more than 80% of your conventional mortgage, chances are, you are paying private mortgage insurance to protect the lender in case of default. Redirecting this amount — usually 0.05%–1% of the loan amount annually — to the principal on your mortgage can have a big impact over time. Lenders are required to remove it after you’ve reached a 78% loan-to-value ratio.

REFINANCE INTO A LOWER RATE BUT KEEP PAYMENTS THE SAME

The benefits of refinancing your loan but sticking to the same payments are twofold: You will pay less in interest over the life of the loan and create a shorter path to mortgage freedom. Plus, it’s not as drastic as jumping from a 30-year mortgage to a 15-year mortgage.

REFINANCE INTO A 15-YEAR MORTGAGE

Cutting your loan term in half is a big financial step, but the benefits are substantial. Not only will you shorten the payoff time, but you’ll also be rewarded with a lower rate and pay significantly less in interest over the life of the loan. The key here is determining whether you can shoulder the larger monthly cost that comes with a 15-year mortgage. Make sure you have the cash flow to afford this new monthly payment on a regular basis.

Choose the option that works best for based on your current financial situation and any possible changes you foresee in the future. If you have a steady job or career that you feel confident will last in the long term, it might make sense to refinance to a shorter term. If your income is a bit less consistent, you may want the flexibility of making additional payments when you can.