4 efficient ways to pay of your mortgage faster than you planned

One of your largest purchases in your life is your house which makes the monthly mortgage payment one of your biggest financial obligations.

It would be great if there were ways to pay off that mortgage faster or a way to avoid paying too much in interest on the loan.

The first good thing is that there are ways to start paying off the loan faster and accelerate the payment schedule.  The other great thing is that interest rates are at historic lows and therefor the cost of the loan is not that high and the total interest paid is lower than when rates were much higher in the past. The low interest rate environment is great as it keeps the monthly mortgage payment lower and it is great as it allows people to afford more house for their budget and total interest paid on the loan is lower.  The question is whether the low interest rate also creates a problem that many do not consider; does the low interest rate environment change the way that home owners should look at the payoff options? We will address that after looking at the ways a mortgage could be paid off faster.

 

So we will look at 4 ways that will help you be mortgage free and we will additionally look at 1 way where you will not accelerate the payments on your mortgage.

Pay bi-weekly

If you go ahead and pay half monthly mortgage payment bi-weekly, you will effectively end up making an extra full payment every single year which in effect will cut down the years that it will take you to ultimately pay off the mortgage balance

Add a little extra to every payment

That little extra payment that you can add to your monthly payment will all go towards paying down the principal and ultimately your mortgage will be paid off faster than if you only paid the minimum required payment.

Refinance.

Refinance to a lower interest rate (if possible) and keep paying your original amount. By doing this you will continue within your original budget but your mortgage will be paid down faster

Change your mortgage term from a 30-year mortgage to a 15-year mortgage.

By switching to a 15-year mortgage you will be on track to be mortgage free in 15 years.  You will enjoy a lower interest rate than a 30-year mortgage but you will have significantly higher monthly payments.

 

These 4 examples are all simple and easy ways that can help you be mortgage free earlier and it is an easy way to have some forced savings as well.  The question now is if paying off the mortgage is what you want to do.  When you decide to put an extra payment towards your mortgage or when you decide to go from a 15 to a 30-year mortgage you are also telling yourself that you are happy to invest your money at the interest rate of your mortgage. If you have a mortgage with an interest rate of 4% and you get some tax deductions as well you should consider and decide if paying off your mortgage faster is the best way to go.  Assume that you for 10 years put an extra $500 a month towards your mortgage. What you could consider is taking that $500 and asking yourself what rate of return you would be happy to achieve over a 10-year time period and also ask yourself how important liquidity, flexibility and upside potential is.  If you feel that there are more upside potential elsewhere and that over time you can do better than 4% then putting it into your house might not be your first choice.

 

If you, instead of paying off the mortgage faster, create a side account where your money is invested, you can at any point in time take that money and apply it to the mortgage or you can use that money for other purposes.  With interest rates being historical low these are good reasons for not paying off the mortgage on an accelerated basis.

Always build liquid savings accounts before you tie up your money in places that are difficult to access.

 

2016-26074  Exp. 10/17