5 Steps to Paying off your Mortgage Early

CO Home Loan PicHere are five simple tips to reduce the interest you pay by increasing your principal reductions.

1- Pay additional principal every month:  This may seem simple, but in fact, some have a hard time with this and usually will default to paying the minimum every month.  By paying just $100 extra per month, you will reduce the term of your mortgage by several years (the exact amount depends on your loan amount and interest rate), thus saving you thousands of dollars over the life of your mortgage loan in interest.

2- Pay bi-weekly instead of monthly:  Many mortgage servicers (the company you actually make your payment to) offer this option, but beware, some will charge you a fee to do it.  By paying half of your mortgage payment every other week you will end up paying one extra payment per year.  If you make payments monthly you pay 12 payments.  If you pay bi-weekly, you end up making 26 payments, not 24.  This will reduce your principal balance much faster, thus savings thousands of dollars over the life of loan.

3-Make one extra payment per year:  If you cannot do recommendation #2 due to your budget, make one extra payment per year (typically when you get your tax refund back) and you will have effectively done the exact same thing.  By doing this, on average, you will have reduced your mortgage by 5-7 years.  This obviously depends on your loan amount, interest rate, & loan terms.

4-Refinance to a shorter term mortgage:  Did you know that going from a 30 year mortgage to a fixed 15 year mortgage, you will save more than double the interest you pay over the life of the loan?  It’s true!  The reason for this is the shorter term mortgage will have a lower interest rate and Annual Percentage Rate (APR).  Thus, even more of your payment will be applied toward the principal of the mortgage.  You will, of course, have a higher monthly payment, but in some cases, if you haven’t taken advantage of these record low interest rates, your payment might just be the same as you’re paying now.  Take the chance…the reward later in life will be well worth it!

5-Refinance your mortgage into a money merge account:  I personally am not a fan of this method but it is definitely one to consider if you are financially savvy & disciplined.  This type of loan is similar to that of a Home Equity Line of Credit, or HELOC for short.  This is typically a variable rate mortgage and it’s designed for you to deposit all of your money into this account (just like your checkbook).  The intention of this is that you will hopefully deposit more money than you withdraw for expenses on a monthly basis, thus reducing your mortgage principal extremely fast.  This type of loan calculates interest daily rather than an amortized interest in a traditional mortgage.  By you depositing all of your money and only using what you need, and interest compounded daily, you will have paid less interest over the life of the loan, thus paying off your mortgage much faster.   Beware of companies that try to sell you software for several thousands of dollars to do the same thing.  If you are disciplined and savvy with your money, you don’t need software to tell you how much money to save or to spend.

This article was written by Brett Popish of Universal Lending.   He’s a great resource for any home buyer.  Check out his website where you can learn how to renovate your home and add the cost of the project into your loan through the FHA 203K Renovation loan, access all different types of mortgage calculators, and even view a directory of recommended professionals.

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