For many people, buying their own home is a cherished dream. Of course, buying a house to call your own, comes at a hefty price. That’s where mortgages help to make the dream a reality. As you know, a mortgage is a type of home loan. When you buy a house, you need only pay a certain percentage of the cost as a down payment. The rest of the expense is covered by your mortgage. You can start living in your house and pay back the rest gradually over time.
While mortgages are great, they do have their downside too. Since the mortgage loan is usually quite a large sum, it may take years - even decades - to pay it back. Sometimes, a longer repayment period may also mean that you pay a greater chunk of interest on your loan. So, what if you could pay off your mortgage faster? Let’s suppose you came into some extra cash - wouldn’t it be a huge relief to complete those payments for good? How do you do it? Let’s explore some possibilities.
Is it possible to pay off my mortgage faster?
Short answer, yes! You can pay off your mortgage faster. Since mortgages tend to last for a couple of decades, if you can pay off your mortgage faster, you will end up saving a lot of money. Plus, you won’t have to worry about making your mortgage payments every month.
When you pay your mortgage loan monthly, the amount is split into principal and interest. Initially, a large part of your payments won’t go towards paying back the principal amount, but in paying the mortgage interest. Over the years, the percentage of payment that goes towards repaying the principal amount increases. So, if you pay off your mortgage faster, you pay less towards interest in the long-term.
How can I pay down my mortgage faster?
Now that we’ve established that you can pay down your mortgage earlier, let’s look at some easy ways to successfully pay down your mortgage faster than planned.
- Increase your payments
An easy way to pay down your mortgage faster is by increasing your mortgage payments. Adding even $50/month can help you reduce the mortgage term to a large extent. Just be sure you’re able to make extra payments on your mortgage without penalty. You can also pay bi-monthly. You can split your monthly payment into two smaller payments and pay twice a month. Bi-monthly payments allow you to make a higher number of mortgage payments in a year, reducing a full month’s payment cycle, and saving you interest.
- Refinance to a shorter mortgage plan
Refinancing your mortgage is called mortgage recasting. This helps you make a large payment towards your principal amount. Your lender will then re-amortize the loan to reflect the new principal amount. This will help you reduce your monthly payment. It will also help you save interest on your mortgage plan. If the reduced amount helps you make larger payments towards your mortgage, you can pay down your mortgage faster than expected. Please make sure you check the mortgage recasting fee and ask your Mortgage Specialist and Realtor for all the details. You may also have to check if your mortgage can be refinanced in the first place.
- Refinance to a shorter-term length
The longer your mortgage term, the lesser your monthly payment will be since the mortgage payments are spread out over a greater period. People usually end up opting for a longer-term length so that the monthly payment towards their mortgage is lower compared to a shorter term length. Over the years, you may find that your monthly income increases or your lifestyle changes, allowing you to free up more money. At that point, you can refinance your mortgage term to a shorter length. You need to note that refinancing to a shorter-term length means a higher monthly payment towards your mortgage. However, this will help you clear your mortgage related debt faster. You’d also save on the interest amount you’d pay over a longer term.
- Round off your mortgage payments
Another way to pay down your mortgage faster is to round off your monthly payments to the nearest hundred. For example, if you are paying $810 as your monthly mortgage payment, you can round it off to $900 and pay that amount. While it may not seem like a big amount, the extra dollars add up. Using this method of rounding off to the next hundred will help you pay more towards your mortgage payment monthly. This, in turn, will mean you would be able to pay down your mortgage faster. Again, you’ll need to check if you’re able to do this without penalty.
- Channel extra income towards mortgage payment
You might also periodically come into extra cash like a tax refund, holiday bonus, or credit card reward - anything that you never accounted for in your monthly budget. If possible, try to channel that money towards your mortgage payment. You can also get creative about making extra income. A passive income is a way to earn that doesn’t require you to work continuously or at all. For example, subletting a part of your house can help you earn money that can be put towards your mortgage payment.
Should I pay off my mortgage early?
Now, this is very significant. Just because you can pay down your mortgage early, should you do it? It depends on your financial situation. So, how do you decide? Let’s look at some of the pros and cons of paying down your mortgage early. This should help you make the right decision for you.
You save on interest
As we’ve touched upon above, when you pay down your mortgage sooner, you will save a lot of money on interest. Depending on your loan amount, interest rate, and terms of the mortgage, you can end up saving thousands of dollars.
You gain house ownership sooner
When you take out a mortgage on your house, you run the risk of your house being repossessed by the lender if you fail to make your payments. Since the lender forks up a large portion of the funds to purchase the house, they own most of it. You may live in it, but it is not fully yours till you have paid off your mortgage. If you were to pay down your mortgage sooner, you would gain complete ownership of your house sooner.
You reduce your debt and financial burden
While credit or loans allow you to buy the things you need or want, they need to be paid back. Having any kind of debt adds to your financial burden. You are obligated to make enough money to pay your debts in the way you planned and agreed upon. This burden can cause stress and worry. If you pay your mortgage off early, you will ease your financial burden. You won’t have to worry about making your monthly payments anymore. Not having to worry about making enough money to pay your mortgage is a good reason to want to pay down your mortgage faster.
Missing out on better investments
If you do come into some extra cash, is paying off your mortgage the best use of that money? Could you put that money towards an investment with high return, instead? In that case, paying down your mortgage faster may mean you miss an opportunity to invest and earn more than you would have saved on interest.
Paying off high-interest debt may be a better option
Paying down your mortgage early may seem like a good idea because of the long repayment period. However, if you have other loans that charge a high-interest or debt such as outstanding credit card payments, you should prioritize paying those off first. This is because the amount you would pay on those high-interest debts may be larger than the amount you would save on your mortgage interest. For example, at Innovation, we offer attractive interest rates on mortgages, so the interest our customers would pay on their mortgage would be less. Of course, this won’t always be the case, but you need to bear in mind to always check and weigh your options.
So, there you have it - some great ways to pay down your mortgage faster. Plus, you also know the pros and cons of paying down your mortgage faster so you can make an informed decision. If you’d like to pay down your mortgage, our 20/20 pay-down option allows you to pay 20% of your original mortgage principal each year without penalty AND increase your monthly payments by 20% without penalty.