This is a guest post from Bob. He runs a personal finance blog that tackles topics like getting out of debt, budgeting, saving, and making money from a Christian perspective at ChristianPF.com.
Any homeowner would tell you that one of their dreams is to have the peace of mind of owning your home outright. However, very few people actually do some of the simple steps that it takes to pay off their mortgage fast.
Paying off your mortgage early can actually make very sound financial sense. It can end up saving thousands of dollars of interest costs in the long run. These are a few tips to help you if you are wanting to pay off a mortgage early.
Tip #1: Once you have secured a mortgage on your home, commonly with the purchase of your new home, make extra payments as early as you can in the life of the loan. This is because amortized mortgages payments are mostly interest up front so the faster you get through the interest the sooner youâ€™ll be paying on the principal. Monthly payments for the first five to seven years are the heaviest of interest. Most people are shocked to see that after all of this time that they have only reduced the principal by a small fraction compared to all the interest paid towards the loan. This is especially important if you buy your property with a low down payment. Pay down your mortgage faster in the early years so that you can gain equity in your home faster and save on interest payments.
Tip #2: You can always schedule a yearly lump sum payment to speed up the process as well. Some homeowners like to take their tax refund or yearly bonus form work and apply it directly to the principal of the loan. Most mortgages nowadays allow you to prepay on the loan without penalty, but itâ€™s better to be safe than sorry so make sure to check your mortgage documents.
Tip #3: For the sake of consistency, a lot of people like to put a little more into their mortgage payments every month. Prepaying a little each month is not only a good idea, especially early in the life of your mortgage, but will allow you to maintain a consistent monthly budget. Regardless of how you decide to increase your payments and pay off your mortgage sooner, it is always a good idea to make sure that your payments are being handled as they should be. Sometimes when the lender receives a payment from you without expecting it, since normally payments are all set up on a monthly cycle, they wonâ€™t know what to do with your extra payment.
Tip #4: Itâ€™s a great idea to make extra principal payments using a separate checking account or payment and make a note in the memo line of the check and notify your lender or servicing company that these payments are to be applied to principal reduction only. This way you can also tally up all the extra payments and make sure they have been applied correctly each year when you’re doing your income taxes.
Tip #5: Itâ€™s always a good idea to stay informed and up to date with respect to your mortgage. Usually, when people get a mortgage, other than making the monthly payments, they easily forget all about it until the following month. However, staying on top of new refinancing options and the current interest rates might just save you money. This is especially important if you have adjustable and rate mortgage or interest only loan and want to take steps in preparing for your mortgage future. Itâ€™s also a good idea to have a mortgage plan in mind to speed up paying off your mortgage early.
Even though paying down your mortgage swiftly is a smart move for a lot of homeowners, it can be a bad idea for others. For instance, if you have a low interest rate on your mortgage, then it might not be the best move financially to pay off the loan as quickly as possible. You could be placing these extra monthly payments into a higher yielding investment such as stocks, funds, or even putting the money to better use paying off high interest credit cards. In addition, if youâ€™re thinking of moving soon, then you ought to hold off putting all you extra savings into your current home since you may need it to purchase your new home, for a down-payment or closing costs, especially in todayâ€™s market where it might take longer to sell you old home.
Do you have any tips or suggestions on how to pay off a mortgage quickly?