Four Ways to Pay off Your Mortgage Earlier
Paying off your mortgage can be a lengthy process depending upon how you choose to approach the situation. For those with limited income, taking your time to pay off your mortgage may seem like the only solution, but there are other options available. Paying extra each month can help you get through the bulk of your mortgage payments without falling into debt in other areas. You do not need to pay a large sum to make biweekly payments on your mortgage—all you need to do is pay slightly higher than the requested amount.
There are four key steps you can take to work toward paying off your mortgage earlier than you originally projected. By putting these payment methods to good use, you can pay down your mortgage in a timely fashion and still have money to spare. Even if you do not have a large savings prepared for your home, your mortgage payment can be manageable if you follow these steps.
1. Purchase Within Your Price Range
If you are in the process of purchasing a new home and you know you must take out a mortgage loan to achieve this goal, it is important to stay within your price range while looking at properties. Oftentimes, mortgage lenders approve customers for an amount higher than what the customer can truly afford to pay to buy a new home.
Once you have received preapproval for a loan, work together with your partner or with a financial advisor to determine how much you can realistically afford to spend on a new home. Calculate your annual income, your projected monthly budget and any other outstanding debts you may be paying off currently, such as a credit card bill or a student loan. While your lender may have approved you for a large loan amount, you are not required to spend the entire amount when purchasing a home.
When you are looking at homes, only select homes you are comfortable purchasing, even if you can technically afford pricier homes. By taking out a smaller loan, you end up in a much better financial situation than if you take out the largest loan possible. The more money you save on buying your home, the more you can spend on furnishing your home.
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Buying a home in a price range you are comfortable with is imperative when it comes to being able to pay off your mortgage early. The banks use a variety of factors to determine how much you are pre-approved for when calculating your loan amount and you cannot trust the number the bank reaches is a number you can afford. By taking the time to calculate your own budget and to set your own price point, you are taking the first step toward being able to comfortably afford your mortgage payment each month.
2. Pay Extra Toward your Mortgage Each Month
One of the easiest ways you can pay off your mortgage earlier is to pay more each month. You may need to speak with your lender in advance to determine if extra payments are acceptable year-round or if you are only allowed to pay extra during certain periods. Some mortgage loan lenders stipulate you can only pay extra toward your mortgage loan during specific times throughout the year.
By understanding when you can and cannot pay extra toward your mortgage you can determine a payment schedule meeting all the required needs of your loan. When you can pay more toward your loan, it is important to do so, as this helps you reduce your interest and ultimately helps you pay off your loan sooner. For example, if you have a mortgage for approximately $230,000 and you are projected to pay off this loan within the next 25 to 30 years at an interest rate of four percent, paying more each quarter can help you significantly reduce this timeframe.
By paying more than your requested loan payment each quarter, you save up to $65,000 in interest and reduce the amount of time you have before your loan is repaid by a decade or more. You do not need to pay hundreds of dollars extra each month to meet these goals—simply round up to the nearest dollar amount when making your payment and this added amount can help you more than you think.
3. Meet Your Principal Early On
When it comes to home mortgage loan information, it is important to pay a portion of your principal early on. This will significantly reduce what your long-term costs and can set the tone for your mortgage payments for the next several years. The easiest way to meet your principal early is to regularly make added payments each month as previously mentioned.
When you pay more toward your mortgage, you are more likely to reduce your principal instead of simply paying your interest amount. Your principal cannot be reduced if you are only paying your interest each month. The earlier you repay your principal, the easier it becomes to pay off your mortgage sooner than projected.
Compound interest rates are difficult to manage when you pay what is requested of you without attempting to make regularly scheduled additional payments throughout the year. To reduce your overall payments, tackle your principal first.
4. Put Your Tax Refund to Good Use
You may find it difficult to pay extra toward your mortgage loan each month if you are on a tight budget due to restricted income or additional debts you are trying to pay off. One of the best ways you can ensure you are making added payments to your mortgage loan is to set aside a portion of your tax refund to put toward this goal. Once you have calculated how much you are expecting to receive through your tax refund you can determine what portion of this money can be used toward your mortgage loan.
You can set aside $500 or $1,000 depending upon how much you are projecting to receive from your tax refund. By making one large added payment toward your mortgage every year, you are creating the same effect as if you were paying an extra amount each month.
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