Early payment of your mortgage loan can save you a lot of money in the long term and provide financial stability. Homeowners can pay off their loan earlier as long as they follow specific rules in accordance with the loan agreement. For a long-term mortgage, the bulk of payments made in the first years goes toward loan interest. As we approach the end of a loan term, the bulk goes toward the principal. However, if extra early payments reduce the principal, then the interest reduces too. An increase in the principal payment increases the homeowners’ equity in the home. When considering early payments, first enquire whether there is a penalty associated with early payments. Many mortgage lenders do not penalize early payments, but those who do will charge for early payments. When you make extra payments, ensure you inform your lender that you want that money applied to the principal. Also ensure that you get your mortgag from reputable lenders, you can use mortage reviews to find reliable lenders. Here are tactics you can use to pay off your mortgage early:
- Refinance Your Mortgage with a Shorter-term
Generally, borrowers opt for a long-term loan to lower their monthly payments. However, with time, your income may increase and free up more cash flow enabling you to refinance your loan to a shorter duration and crushing your repayment period into shorter-term increases your monthly payments. It saves money on interest, mainly if you are legible for a lower interest rate.
- Biweekly payments
You can split your monthly payments into two smaller payments and pay them after every two weeks. This ensures early mortgage payment without any additional payment required. Typically, most mortgage lenders require you to make monthly payments, that is, 12 payments in a year. If you switch to payments after every two weeks, you end up paying 26 times by the end of the year, and thus one extra payment is realized. This fastens the pace of payment as well it reduces interest. Not all lenders allow biweekly payments, though most of them do. It is good to consult your mortgage lender if they allow this payment to avoid unnecessary charges.
- Include Early Payment in Your Budget
One of the ways of clearing your mortgage debt faster is by paying more than the monthly amount due. It might seem to be obvious, but that little extra money can take you far. You need to create a room in your budget to accommodate this extra payment. Obviously, putting more money towards extra payments can result in more payments. You don’t have to go overboard and sacrifice your financial goal to make these extra payments to pay off your mortgage faster. So, ensure you are investing and paying other high-interest loans before you begin to cut down other areas in your budget because mortgages are cheap.
- Schedule Extra Payments
If you cannot come up with extra money for additional monthly payments or don’t want to, you can opt for a couple of well-timed extra payments throughout the year. Perhaps you receive an annual bonus from tax returns or work every august. If you apply that bonus to the same mortgage, for instance, you will cut down your loan and save a significant amount on interest.
- Recast Your Mortgage
Mortgage recasting is where you pay one large lump sum towards your principal balance. The mortgage financing institution will then amortize the loan to show the new balance. Recasting a loan decreases your monthly payment and saves you money on interest over time.
- Rounding up your mortgage Payments
Another way of significantly reducing your mortgage term is rounding up your payments. When budgeting your monthly mortgage payment, it is advisable to round it to the next $100 amount. For example, pay $700 instead of $630 or $800 instead of $770.
- Use the dollar-a-month payment plan
This strategy is financially possible if your income slightly increases consistently over time. Increase your monthly payment by $1 each month. This will make a significant impact on a long-term mortgage in reducing the loan term.
- Use unexpected income
At times we get money that we never expected. Borrowers can decide to send those unexpected windfalls to their mortgage lenders. The unexpected income may consist of tax returns, credit card rewards, and holiday bonuses.
Because mortgages are long-term loans that can take you decades, paying off the loan earlier is better. It makes you feel relieved with no monthly payments to worry about. It feels great to get rid of the huge financial burden. Reducing the loan term by making extra payments saves a lot of money in the long run. If you cannot make a particular payment, it is good to call your lender in advance and ask for mortgage assistance.