Best Way to Pay Off Your Mortgage
Best Way to Pay Off Your Mortgage
Can you believe the year 2021 is almost over? We at eHome want to applaud you for your accomplishments this year, and we want to help you plan for new victories next year!
If you are like hundreds of thousands of others, you are probably setting goals and resolutions for 2022.
Maybe you want to lose weight or get healthier. Perhaps you want to get married or take a big family vacation. Or just maybe, you want to reduce your debts.
We may not be able to offer you advice about health or wealth per se, but we do have some suggestions for you about your mortgage payments.
Specifically, we want you to know that you CAN pay off your mortgage before its 15-year, 20-year, or 30-year term limit. It is possible, and we can help you see how!
Breaking Down Your Mortgage Payments
If you have a loan on your home, you make monthly mortgage payments. Typically, your payments are split among 3 costs:
- Principal repayments
- Interest payments
- Escrow deposits
Your escrow pre-payments are based on your yearly homeowners insurance and property tax dues, so they will not change much over the course of your mortgage.
However, the amount of money you pay toward principal and interest changes greatly over your loan term.
For instance, in the first few years of your loan, most of your payments apply toward your interest owed. As you pay down the principal balance of your loan, you owe less interest.
Thus, toward the end of your mortgage, the majority of your monthly payments apply toward your principal balance.
That breakdown of principal and interest payments tells us that:
Making extra payments on your principal balance toward the beginning of your loan can greatly reduce the amount of interest you owe throughout your loan. That can save you thousands of dollars and reduce years from your mortgage term.
What is the Best Way to Pay Off Your Mortgage?
So if you want to save money on interest payments and pay off your mortgage early, what is the best way to do that?
Typically, we suggest doing one or all three of the following things to pay off your mortgage early.
Option 1: Make Extra Principal Payments
Extra payments are extra payments, no matter how small they are. One extra payment here and there adds up over time, especially if you make the supplemental payments in the early years of your mortgage loan.
So start small. Try rounding up your monthly payments to an even dollar amount or hundred dollar amount.
For example, if your mortgage payment is $984.72, make payments of $990.00 or of $1000.00 each month. The “small” extra principal of $5.28 or $15.28 you pay each month can reduce your interest payments by a thousand dollars or more over the life of your loan.
If you get paid more than once a month, you might want to set up your loan payments to come out bi-weekly rather than monthly. That way, over the course of 52 weeks a year, you will make 13 payments instead of 12.
If you do not want to commit to 13 regular payments, set aside your tax refund, birthday money, or Christmas money to make an extra payment every quarter or every year.
No matter how or when you make your extra payments, though, make sure you tell your lender that you want the extra money to go toward your principal balance.
Option 2: Refinance to a Shorter Term
If you do not want the “hassle” of scheduling extra monthly or yearly payments, refinancing to a shorter term loan may be a better way for you to pay off your mortgage early.
Essentially, by refinancing your loan, you make a commitment to your lender that you will pay more on your home’s principal balance every month than you would if you took out a 30-year note.
Your monthly gross payments will be higher than they would be on a 30-year note, but the interest you pay will be significantly less because you will be paying down your principal balance more quickly.
Additionally, many lenders offer lower interest rates on 15 or 20-year mortgage notes than they do on 30-year ones. That, in and of itself, saves you thousands more dollars in interest.
Just make sure you can afford those higher monthly payments before you make a commitment this big.
Option 3: Make a Large Lump-Sum Payment
Finally, you can always make a one-time large, lump-sum loan payment to pay off your mortgage quicker.
Timing may be everything on this option, though.
Paying down the principal of your loan at any time will be helpful, but remember that you owe the most in interest when your principal balance is at its highest.
Therefore, the sooner you make a large, lump-sum payment on your mortgage’s principal balance, the more interest you will save.
So if you come into an unexpected inheritance or extra tax refunds or a workplace bonus, consider throwing a large amount of that money onto your mortgage to reduce your interest owed and your term!
Make it Happen!
However you decide to pay off your mortgage, we know you can do it!
You don’t have to pay it off in a year or two years to save thousands of dollars. Paying a little bit here and there will save you money no matter what.
So set your financial goals for 2022, and set aside a little extra to go toward your mortgage payoff.