This guest post is by Fred Leo from TheCreditCardHawk.com, a personal finance website dedicated to helping people find the best rewards credit cards. Please check out his articles on the Best American Express Business Credit Cards and Citi Mastercard Online.
Paying off your mortgage before it’s due is the dream of every American. The sooner the better, in most cases. Many would say that if they won the lottery tomorrow, they’d pay off their mortgage the day after. The good news is, it’s actually possible for just about anyone to pay off their mortgage faster. Here are three ways to get the job done.
First: Understand How Mortgage Amortization Works
Amortization is the process which covers the life of the mortgage loan and calculates interest for each payment as the principal shrinks. So over a 30-year time span, the interest payments versus the amount being paid towards the actual cost of the home begin to change positions on the ratio teeter-totter.
In the beginning, most mortgage holders are paying more interest than principal on their loan. As the principal shrinks over time, however, the interest does as well. So payments of $1,000/month might, on Day 1 of the loan, be 80% interest and 20% principal, but by Day 9,000 (nearly 25 years into it), the ratio may be 80% principal instead. This example, of course, is simplified and over-exaggerated for illustration, but this is basically how amortization works.
For most homes, the interest and the principal are roughly at a 2:1 ratio, so your home at $100,000 will actually cost you almost $200,000 in total payments. In most cases, the faster you pay it off, the lower that interest is (in dollars).
Second: Increase Payments
The quickest way that any homeowner can pay off that mortgage faster and save thousands in interest is to make more payments. This can be done by either increasing monthly payment amounts or speeding up the payment schedule. If your monthly payment is $1,000, boost that to $1,250 instead. This means you’re making 3 extra payments every year. Your mortgage will be paid in 24 years, or six years early.
The other option is to increase the payment schedule. Move it from a monthly to a bi-weekly, for instance, and you’ll probably keep the same overall monthly payment, but will increase your payment towards principal since interest should still be compounded monthly. This will mean lower interest overall.
Third: Refinance, But Don’t Raise
The third option is to refinance and lower the rates. Just don’t fall into the trap of adding more debt to the overall mortgage in the process, whether it be by consolidating other debt or lowering payments and then not applying more to the payoff. The best advice is to refinance at a shorter term. Many will find that with the lower interest rate and lower principal, since your equity is now free, will mean payments on a 15-year loan might be on par with their current payments on a 30-year loan.
Refinancing is not a simple decision, however, and should be done with the advice of a solid financial adviser.
No matter how you do it, speeding up the payoff on your home is going to be in your favor almost every time.