Paying off your mortgage early is an amazing thing for anyone who owns a home. More money in your pocket every month, not worrying about the next payment, and knowing you own something permanently is amazing.
But, what are the ways to pay off your mortgage early? What is the best way to pay off your mortgage early? These are the things we will discuss in this article.
Ways to pay off your mortgage early:
- Pay extra towards the principle each month
- Make an extra mortgage payment each year
- Refinance to a shorter term like 15 years
- Make bi-monthly mortgage payments
- Use a HELOC as Your Bank Account
What happens when you pay extra principal on mortgage?
One great way to pay off your mortgage early is to make extra payments towards outstanding principal amount whenever you are paying the equated monthly installment (EMI) or whenever you have extra money.
Most lenders have this provision whereby the borrower can pay an extra sum of money whenever he so desires toward the principal amount. This payment that is apart from his regular EMI payment is adjusted against outstanding principal amount.
By paying some amount of money towards your Principal, you can not only save a lot of money otherwise paid in the form of interest, but also pay off your mortgage balance much earlier than its duration.
This is a good way of making sure that you can pay off your mortgage months or even years before its specified duration. Of course, the efficacy of this method depends upon your financial situation and whether you are able to generate additional income on a frequent basis or not.
How can I pay down my mortgage faster?
There is no alternative to a mortgage when you are buying a home. This is because real estate transactions are costly, involving lots of money. Government provides many reliefs to buyers so that mortgage does not feel like a financial burden to them. However, if you want to live in a stress free manner, there are many ways in which you can pay off your mortgage earlier than its duration.
- Make payments biweekly instead of monthly payments
There are many people who would say what difference paying half the amount biweekly will make as it is same as paying double the amount once in a month.
However, the fact that there are 52 weeks in a year and hence you pay 13 EMIs instead of regular 12 means your mortgage finishes off quicker in this fashion.
If your EMI set by the lender is $2000 and you pay 12 instalments in a year, you repay $24000 to your lender.
On the other hand, if you pay $1000 on a biweekly basis, you still pay $2000 in a month. But as there are 52 weeks in a year, you pay $1000 26 times to eventually pay $26000 instead of $24000.
This means you pay one-month instalment extra every year if you choose to pay biweekly instalments to your lender.
This will help you in finishing off your mortgage a few years earlier than its normal duration.
2.     Pay extra payments into your principal
Another way to speed up the process to paying off your mortgage quickly is making extra payments into your principal.
Whenever you have extra money, you can pay off a certain amount from your principal, informing the lender about where this payment should go.
You can reduce your outstanding principal in this fashion which helps in reducing the overall amount paid in interest. It also finishes your mortgage earlier than it normally would be paid off.
3.     Get a refinance of a shorter duration
If interest rates have fallen since you took your mortgage, you can go for a refinance of your loan from the same or another lender.
You can take advantage of reduced interest rate that either lowers your EMI or helps in shortening the duration of your mortgage.
4.     Pay into your mortgage account whenever you earn extra money
Deposit money in your mortgage account whenever you get a bonus from your employer or win a lottery. You can do the same with tax refunds that you get form the government.
If you get a raise from your employer, consider paying increased salary into your mortgage account. These extra payments will help in paying off your mortgage much earlier that it is scheduled to finish.
You pay a lot of money to your lender in the form of interest. In fact, borrowers end up paying more money than they borrow from the lender over the entire life of the loan.
High amount of interest is often a result of a very long duration of loan.
By paying off your mortgage early, you actually save the money that you otherwise pay as interest to your lender.
Increase your cash flow if you pay off your mortgage
For average homeowner, EMI of a mortgage usually amounts to more than 30% of their monthly household income.
You can easily imagine how much easier and relaxed it would feel if you don’t have to think about your lender every month. This is possible only if you pay off your mortgage earlier than its specified duration.
By paying off your mortgage early, you will have significantly more money in your pocket each month.
Imagine that entire mortgage payment staying in your pocket each month.
This is especially beneficial if you are going to retire soon. Imagine having more money in your hand every month rather than arranging from your meager sources after retirement to deposit money in your loan account.
Getting rid of mortgage is also good for emotional well being of some homeowners. There is no mental stress if you pay off your mortgage quickly rather than when you allow it to linger on for many years.
Benefits of paying off mortgage early
What can be the benefits of paying off mortgage early? Well, who doesn’t like to live a stress free and debt free life? If there is a sword of a monthly installment always hanging on your head, you cannot live in a calm and relaxed manner.
Therefore, the biggest benefit of paying off your mortgage early is to live a stress-free life.
If you have purchased your home in old age, the very thought of having to arrange the EMI after retirement can be very disturbing.
If you try and pay off your mortgage early, you can live in a relaxed and stress-free manner after retirement when you do not have a steady source of income.
How to pay off mortgage early with heloc?
HELOC is an acronym that stands for home equity line of credit. HELOC is a loan that allows a homeowner to get a loan from their lender against the home equity that they have built. It is like a credit card with a limit that is decided by the equity you have built.
You can use this equity to take money from HELOC in the form of simple interest and use it to pay off your mortgage that is calculated based on amortized interest.
The idea here is to pay off your principal based on which interest is calculated on your mortgage.
Home Equity Line Of Credit is a loan that is available to a homeowner at a low interest rate. It is cheaper than a personal loan though carries a variable rate of interest higher than his mortgage rate. HELOC is a secured loan that is easily available to someone who has already got a mortgage.
Ask your lender if your equity has grown enough to get HEOLC and pay off your mortgage with it.
How to pay off mortgage early with credit card?
If you have got a mortgage at a high interest rate, you know you will be required to pay a lot of money in the form of interest over the next 20-25 years.
If you calculate this interest, you would be surprised to see that it turns out to be even more than the principal amount you owe to your lender.
However, as credit card companies charge a very high interest rate which is much higher than your mortgage rate, it is not wise to make your monthly repayments towards your mortgage account using your credit card. In fact, most lenders do not allow payment using credit card.
Even credit card companies do not allow EMI payment using credit card.
You can earn large numbers of reward points by making payments in your mortgage account, but you ultimately pay a lot more interest to Credit Card Company than your lender.
How to pay off mortgage early without refinancing?
If you are desirous of paying off your mortgage earlier than its duration, refinancing is a great option for you. Many homeowners go for a refinance if interest rate drops after some time.
However, if refinancing is ruled out, you know you need to make extra payments regularly in your mortgage account if you want to pay off your mortgage early.
- You can pay extra money in addition to your EMI and ask the lender to adjust it against your principal amount.
- You can make biweekly payments instead of monthly repayments. This helps you finish your mortgage early as you end up paying 13 RMIs in a year instead of regular 12 EMIs.
- You can deposit any extra income that you earn in your mortgage account whether it is a raise, a bonus, or any other windfall that comes your way.