5 Simple Ways to Reduce Your Mortgage Term
When you purchase your home and sign on the dotted line of a 30-year mortgage, it can seem like a lifetime before it’s actually yours, free and clear. What homeowner hasn’t joked, “Sure I own it, well… me and the bank, that is.”
Wouldn’t it be nice to see that day a little closer on the horizon?
Since most of us can’t count on a windfall that will wipe out the remaining debt, we have a few simple ways to reduce your term and pay that mortgage off even earlier than planned.
The Biweekly Mortgage Payment
This method of accelerating your loan payoff is simple, especially if you’re able to tie it to a biweekly payday. Look at your total mortgage payment – principal, interest, tax and insurance – and divide it in two. For example, if your monthly payment is $1,200, you would pay $600 every two weeks. It may not feel like you’re changing the term, but you are. And depending on your interest rate, that thirteenth annual payment can knock years off the life of the loan.
Before arranging your biweekly payment, make sure your mortgage company handles partial payments (even an extra one or two), and that they don’t charge a fee to do so. If it’s not an option, then open a separate bank account just for your half payment every two weeks, and pay your monthly mortgage from that account.
Prepay on Your Principal
By paying a little extra on your principal each month, you’re not only chipping away on the mortgage but you’re also saving – or earning, if you will – the interest that would otherwise accumulate on that amount.
Just how much savings are we talking? It could be substantial. Let’s say you have a 30-year fixed-rate loan of $200,000 at 4% interest. By prepaying an extra $100 each month on the principal, you could save around $30,000 and shave five years off the life of the mortgage.
With many loans, there will be an option when paying online or by mail to specifically pay extra on the principal. You’ll need to make sure it’s noted as such or the majority of your payment will go to interest first. Check beforehand that there are no prepayment penalties or issues with your lender, however most conventional, FHA and VA mortgages allow it.
Reducing your loan by overpaying or prepaying may also provide you with an even better opportunity to refinance.
Refinance to Reduce Your Term
Homeowners with an eye on reducing the term of their loan may also consider refinancing from their current 30-year to a 25, 20 or 15-year mortgage. Several factors could make this an ideal option for shortening the term, especially with current low interest rates. While the monthly payment will probably be higher, you’ll garner a better rate, resulting in more equity in the home and a bigger reduction of the overall life of the debt.
If you’ve been in the home for a short period of time and are able to refinance the aforementioned $200,000 30-year loan into a 15-year with a small rate reduction it could mean saving over $85,000 in interest. Another scenario of a homeowner with equity built up and no imminent plans to sell, could mean even more in savings.
When you’re approaching retirement or planning ahead and can afford that higher monthly payment, it’s in your best interest to reduce the term. Whether staying in the home or keeping it as a rental, this ultimately puts you on track to pay off the mortgage while still owning your home.
Pretend to Refinance
While refinancing is a great way to create a “forced” savings account, you may be looking for a more flexible way to pay off your mortgage early. By crunching the numbers for a reduced term mortgage, you can pay the same amount you would in a refinance and shorten the life of the loan.
The upside is being able to revert to a standard payment if you’re short on cash certain months, without risk of penalties. The downside is missing out on actual reduced interest rates that could save you money in the long run. This method relies on an accountable homeowner who sticks to a plan.
Downsize Your Home and Your Loan
One simple, outside-of-the-box plan to pay off your mortgage faster is to consider downsizing. With a very strong housing market in most regions of the country and historically low interest rates, it may be a perfect time to sell. Then buy smaller, maximize your down payment, and acquire a new mortgage with a reduced term of even 20 or 25 years.
With any one of these simple time- and money-saving suggestions for reducing your term you can save money and own your home outright sooner than expected. We at EnTrust Funding (ETF) understand that everyone’s personal financial situation and goals are different. We’d be happy to help you calculate the savings and determine the practicality for reducing your mortgage term – give us a call today!