A home is probably the biggest purchase that you can make in your entire lifetime. Nonetheless, most people feel it’s worth the effort of paying it for years and spending a huge chunk of their monthly paycheck on it, to make it truly theirs. That monthly payment, called mortgage, takes decades to pay. However, there are steps you can take today that can potentially cut the number of years to pay it off. Let’s take a look at some of them.
Pay extra amounts each year
To be able to pay off your mortgage faster, you need to adopt more aggressive ways, such as making extra payments to your principal when you have the capacity to do so. Doing so reduces your principal debt amount — the amount on which interest is based. Lower principal debt means lower interest payments.
But you know what’s better than making extra payments when you have the resources to do so? It’s making those resources available for yourself, by saving extra each month then making a lump sum payment, probably at the end of the year. Or if your bank allows, do it on a quarterly or mid-year basis.
Refinance when the opportunity allows
Refinancing your home means getting a new loan to pay off the original loan you used to purchase your house. But refinancing should be done only when the interest rate on a new loan is lower than the original loan you got.
Usually, longer term loans yield more total interest payments so another way to reduce that amount is to refinance to a new shorter term loan, for example from a 30-year term down to a 15-year term. In addition to that, keep adding extra payments each year and you could even cut that loan to 10 years.
There could be upfront costs associated in getting that new loan, but if in doing the math, the new loan rate is really in your favor, then don’t hesitate.
Eliminate Private Mortgage Insurance
Private mortgage insurance is an insurance whose beneficiary is your lender. It is an additional cost added to your mortgage to protect your lender in case you fall short of payments. This insurance is charged if you had put down less than 20% down payment on your home; otherwise, you should not be paying this fee. On the other hand, if you think you’re being charged with private mortgage insurance, you should ask your lender how much it is because it is an additional cost that could’ve been paid to the principal.
If you had put down less than 20% down payment, you can eliminate the insurance by adding extra payments to your mortgage, to reach that 20% equity. When you’ve reached that equity, it’s time to talk to your bank again and ask if you are still paying that insurance.
It’s not what people want to hear but sometimes selling the home is the only solution to paying off that mortgage, especially if you have chosen to buy a house you later realized you can’t actually afford. Sell the home and use the proceeds to pay the balance. If there’s still a balance left, you can get a new loan but at least it should now be a smaller one.