With the New Year quickly approaching, you may find yourself thinking about ways to improve your life, and that includes your financial wellbeing. This could mean committing to putting money aside for emergency savings or sticking to a monthly budget. Another goal to consider is paying off your mortgage sooner. This could ease the stress that comes along with homeowner’s debt and could allow you to start saving for a new goal such as a vacation home, boat, or college fund. You may feel like paying off your mortgage early is an impossible goal, but by making small changes to your spending and savings habits, you may be able to make it a reality.
Benefit of Paying Off Your Mortgage Sooner
Many people pay the balance due on their mortgage each month and nothing more. Yet, even a small amount of additional money put towards your loan on a monthly basis could mean substantial savings over the lifetime of your loan.
Paying off your loan early can reduce how much you pay in total interest towards your home. Use a mortgage loan calculator to see how much you could potentially save in interest if you paid your mortgage off in 10 years instead of 20, or in 15 years versus 30. Increasing your mortgage payment by a hundred dollars or so each month could end up shaving years off your mortgage, and could potentially save you thousands of dollars in interest over the life of your loan.
How to Make It Happen
While it certainly sounds nice to throw additional money at your mortgage each month, not everyone has enough flexible income to do so. The good news though, is that most people can find ways to adjust their spending to be able to put even a small amount more toward their mortgage on a monthly basis. Here are a few tips to help you to do just that.
- Have a percentage deducted from your paycheck. Calculate half of your monthly mortgage payment and have the amount taken directly out of your paycheck. If possible, you can have this money deposited directly to the account linked to your mortgage payment – which may be separate from the account associated with your take home pay. If not, be sure to have a system set in place to hold you accountable for saving that amount of money in a separate account when you are paid. This way, when your monthly due date comes around, you already have the money aside and it does not feel as though you are taking the lump from your savings. If you are paid bi-weekly, this method could also help you get ahead of saving for next year’s payments. Because there are 52 weeks in a year, saving on a bi-weekly basis will result in one extra mortgage payment per year. Instead of budgeting for twelve $1,800 monthly payments each year (totaling $21,000), you would be saving for twenty-six $900 bi-weekly payments (totaling $23,400).
- Put extra lump sums towards your debt. Another way to reduce what you owe on your mortgage is to apply any lump sum you receive to your loan. For example, if you receive a large tax refund or a work bonus, put it towards the principal on your mortgage loan. Doing this will help to bring down what you owe faster. Any extra funds that you receive – outside of what you typically budget for – can go towards your mortgage.
- Find ways to trim back your budget. If you feel like you don’t know how you are going to find extra money to put towards your mortgage payment, it could be a good idea to look closely within your budget to find opportunities for savings. Even if they seem small, they may add up over time. Reworking your budget temporarily to be able to pay off your mortgage may be very beneficial in the long term when it comes to interest savings. Here are some ideas for reducing your budget:
- Pack a lunch for work instead of eating out
- Skip the expensive coffee and make your own
- Cook your own meals at home instead of eating at restaurants or getting takeout
- Talk to your utility providers about ways to reduce your bill
- Look into refinancing options. There are many reasons to consider refinancing, but when it comes to paying off your debt faster, there are a few things to keep in mind. If you have the available funding, refinancing to a shorter term loan can save you thousands of dollars in interest, especially if interest rates are currently lower than they were when you initially took out your mortgage. Going from a 30-year loan to a 20-year loan may not sound like a big jump, but that is 10 less years of accruing interest.
- Consolidate debt. If you’re struggling to have enough to pay towards your mortgage loan each month because of credit cards or other debts, you could consider consolidating all of your debt into one payment. This can significantly reduce your monthly credit payments and effective interest rate, giving you more funds to put towards your mortgage payment.
Before making additional loan payments or paying off your entire mortgage early, it is important to discuss it with your lender first. Ensure that there is no prepayment penalty for doing so. Communicating your goals with your lender can also help to ensure you will be able to afford your monthly payments and not go over budget. Even throughout the life of your loan, talking to your loan officer about making adjustments can be beneficial. Your lender can help you determine if it might be a good time to refinance, and they can help you better understand just how much money extra payments could save you in total interest. Paying off and getting ahead of a mortgage may seem overwhelming, but with small adjustments it is possible to do so without jeopardizing your financial wellbeing.
If you’d like to discuss your mortgage whether paying it off early is a good fit for you, contact one of our mortgage experts today.