Shorten The Length Of Your Mortgage Term
If your original mortgage is a 30-year term , then refinancing is a good way to get to the ultimate goal of locking in a 15-year fixed-rate mortgageideally with a new payment thats no more than 25% of your take-home pay.
But if your interest rate is low enough on a 30-year fixed-rate mortgage to compete with the 15-year rates out there, make sure refinancing just to get the shorter term isnt going to cost you more. Youre better off making extra payments on your 30-year mortgage every month to shorten your payment schedule.
It all boils down to thisyou want to own your home as soon as possible instead of your home owning you! Use our mortgage payoff calculator to run your numbers and see what your monthly payment would be on a 15-year loan.
So Should You Pay Off Your Mortgage Early
If you find yourself with a little extra cash at the end of the month, should you put it toward your mortgage loan? Theres no simple yes or no answer. There are both risks and benefits to paying off your loan early, and the right decision will be different for everyone. In this section, well look at a few instances in which it makes sense to pay off your mortgage early and when it doesnt.
Keep Your Payments The Same When Changing Your Mortgage
When you renew your mortgage, you may be able to get a lower interest rate.
Some mortgage lenders may allow you to extend the length of your mortgage before the end of your term. Lenders call this early renewal option the blend-and-extend option. They do so because your old interest rate and the new terms interest rate are blended.
When your interest rate is lower, you have the option to reduce the amount of your regular payments. If you decide to keep your regular payments the same, you can pay off your mortgage faster.
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Put Windfalls Toward Your Mortgage
Another great way to pay off your mortgage early is to make an extra payment toward principal if you get your hands on money you don’t have earmarked for something else. For example, you could use a tax refund, a government stimulus check, cash gifts you receive for your birthday, or a bonus from your job.
When you make these lump sum payments on top of your regular mortgage payment, you can put the entire amount toward paying off your loan balance. This can significantly speed up the time it takes to pay down debt — especially if you make lump sum payments on a regular basis.
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Other Ways To Pay Off A Mortgage Early
Paying off a mortgage early requires you to make extra payments. But there’s more than one way to pay off the mortgage early:
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Add extra to the monthly payments, as discussed in this article.
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A structured way to add extra: Divide your monthly principal payment by 12, then add that amount to each monthly payment. You end up making 13 payments, instead of the required 12 payments, every year.
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A variation of the above tip: Deposit one-twelfth of the monthly principal payment into a savings account each month, then use that money to make a 13th payment.
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Pay half a mortgage payment every two weeks. You make 26 half-payments, equivalent to 13 full payments a year. If you want to try this, first make sure your mortgage servicer is set up to receive biweekly payments.
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Make a lump-sum payment toward the principal. You might do this after receiving a bonus, inheriting money or winning a lottery prize any time a large sum lands in your checking account. Coordinate with your servicer to ensure that the money goes toward reducing principal.
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Refinance to a shorter term. If you can refinance with a lower interest rate, for a shorter term, it’s a win-win. For example, you could refinance a 30-year mortgage into a 15-year loan. The monthly payments will almost certainly be higher, and you’ll pay closing costs, but your overall interest expense will be dramatically lower.
Refinance Your Home Loan
Refinancing your mortgage can be a great way to reduce the length of your loan and pay off your home faster. If youve never refinanced a property, it’s important to understand the options available:
- Interest rate reduction: Interest rates fluctuate throughout the life of your loan. As a homeowner, it’s always a good idea to watch current mortgage rates. Little changes might not make a big impact to your mortgage payment, but a rate drop of 1-2% could. If you’re not sure whether you should refinance, talk to your lender.
- Shorter term loan: Maybe you couldn’t qualify for a 15-year loan when you first purchased your home, but now you can. Refinancing involves reevaluating your financial health. With a higher income, more savings and a better credit score, you could qualify for a much shorter term.
Paying off your mortgage early is a great way to free up extra money and gain financial freedom, but keep in mind that there are usually costs associated with refinancing your loan. There are many options available and your lender can help you determine the right ones for you based on your financial circumstances. If you’re thinking about buying a home, refinancing your loan or are looking for ways to pay off your loan early, talk to a Home Lending Advisor to discuss your options.
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Recap Of Ways To Pay Off Your Mortgage Faster
If you decide you want to pay off your mortgage early, ask your mortgage lender about:
Whatever you choose, make sure youve weighed all your options to find the best use for your hard-earned cash.
Popular Articles
What If I Cant Pay My Current Mortgage
If youre out of work right now and finding it hard to pay your mortgage, theres good news for you. Depending on your specific situation, you may be able to have your mortgage payments lowered or put on hold.5
Doing that can really help to free up the burden you might be feeling right now if youre worried about when youll see your next paycheck.
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Should I Make Biweekly Mortgage Payments
Your home is likely the biggest purchase you will ever make. Even with an interest rate in the single digits, this can often mean tens or hundreds of thousands in interest charges over the life of your repayment a significant chunk of change that you probably wouldnt mind keeping in your pocket.
Luckily, lenders like Rocket Mortgage®;make biweekly payments simple for clients. Thanks to Rocket Mortgage®, these borrowers can set up biweekly mortgage payments for free online. There are no prepayment penalties or fees for setting up a revised payment schedule, either, so youre able to automate the process and save yourself money with just a few quick clicks.
What could you;do with those kinds of savings? For other articles like this one, check out our free personal finance resource center for more information.
Apply Online with Rocket Mortgage®
Should I Refinance My Mortgage
9 Minute Read | September 13, 2021
Ever since the Federal Reserve dropped interest rates in 2020, theres been a new wave of hype around getting your mortgage refinanced. And for good reason too.
Last year, the annual average interest rates for common mortgages was between 2.613.11%the lowest theyve been since Freddie Mac started reporting several decades ago!1,2 And with the Feds saying they wont raise interest rates until 2023, now even more folks are wondering, Should I refinance my mortgage?3
Lower interest rates are great and all, but how do you know if its the right time for you to actually do a mortgage refinance? Well show you how to make a smart decision.
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How To Get Out Of A Car Loan You Cant Afford Experian
Oct 31, 2020 Selling the car: If you sell your car and pay off the loan in full your vehicle could depreciate faster than youre able to pay down the;
Paying off your car loan doesnt have to take forever. From refinancing to warranties, follow our top tips to pay off your car loan faster.
Heres how to pay off your car loan faster by making extra payments toward your principal balance. If you change the frequency of your payment to every two;
If you can afford it each month, the best way to pay off your car loan down on the interest twice as fast and start paying on the principal much sooner.
Oct 18, 2017 Rounding up also means youd be able to pay off your loan about seven months faster. So if you have room in your budget to pay even more and you;
Feb 18, 2021 Your car loans impact on your credit score. It helps to understand how credit scores work theyre all about how you manage borrowed money.
You dont have to make your full loan payment twice each month , instead split your payment in half;
Pay off debt faster by refinancing or consolidating to a shorter-term loan or refinance to a lower rate. Contact Wells Fargo to learn about your options.
See if you can lower your payment by refinancing your auto loan. Do USAA Bank auto loans have application fees or penalties for paying off your car;
By paying half of your monthly payment every two weeks, each year your auto loan company will receive the equivalent of 13 monthly payments instead of 12.
Make Extra House Payments
Lets say you have a $220,000, 30-year mortgage with a 4% interest rate. Our mortgage payoff calculator can show you how making an extra house payment every quarter will get your mortgage paid off 11 years early, and save you more than $65,000 in interestcha-ching!
But before you start making extra payments, lets go over some ground rules:
- Check with your mortgage company first. Some companies only accept extra payments at specific times or may charge prepayment penalties.
- Include a note on your extra payment that you want it applied to the principal balancenot to the following months payment.
- Dont shell out your hard-earned cash for a fancy-schmancy mortgage accelerator program. You can accomplish the same goal all by yourself.
What Does Paying Your Mortgage Biweekly Do?
Some mortgage lenders allow you to sign up for biweekly mortgage payments. This means you can make half of your mortgage payment every two weeks. That results in 26 half-payments, which equals 13 full monthly payments each year. Based on our example above, that extra payment can knock four years off the 30-year mortgage and save you over $25,000 in interest.
Are Biweekly Mortgage Payments a Good Idea?
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Can You Pay Off Your Mortgage Early
In most cases, homeowners can pay off their mortgage early, provided you follow certain ground rules and make sure the terms of your loan.
The first step is to recognize how your payment works. Early in a 30-year loan, the bulk of the payment goes toward loan interest. As the loan is closer to completion, the bulk goes toward the amount you borrowed, or the principal. But if the principal is lowered through extra early payments, the interest paid also is lowered. Paying down principal in the long run will reduce the total interest paid on the loan.
The more the principal is paid, the more the homeowner builds equity in the home.; To easily figure the equity, calculate a fair price you feel the home is worth then subtract the loan balance. If a home could be sold for $300,000 and you have $150,000 left on the loan, you have $150,000 in equity.
When considering paying the mortgage early, be sure you know the answer to a question that many, especially first-time homebuyers, often do not consider: Is there a prepayment penalty on your loan? Many lenders do not have this penalty, but those that do will charge for making early payments. If you have any uncertainty, call your lender to ask specifically about prepayment penalty.
Once that question is answered, be sure to tell your lender if and when you make extra payments that you want that money applied to principal.
Early Mortgage Payoff Calculator
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Put Windfalls Toward Your Principal
Another way to accelerate your mortgage payoff is to put any windfall you receive toward your principal. Tax refunds, special bonuses at work, and other unexpected money should be used to reduce your mortgage principal.
Contact your mortgage servicer to find out how to make an extra principal payment. Some servicers have a specific process you must follow, and you may need to make a second payment, after your regular monthly payment, in order to ensure that youre reducing the principal with your extra payment.
When Is Refinancing A Bad Idea
On the other hand, there are definitely times when refinancing your mortgage would not be a good idea. Well give you some examples.
It wouldnt be wise to refinance because you want to use the money to:
- Get a new car
- Pay off credit card bills
- Roll up other debt into a refinanced mortgage
Wiping out your home equity to buy new stuff you dont need puts your home at riskespecially if you lose your job or have other money issues.
Also, the reason you dont want to roll up other debt into one gigantic refinanced mortgage is because you want to pay off your smaller debts first .
Lumping your student loan debt into your mortgage means its going to take a lot more time to pay off those loans and your mortgage too. It puts you even further away from completing either of those goals. No thanks.
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Make Your Mortgage Numero Uno
;Come into some extra money? Make your mortgage your first port of call.
“A lot of us look forward to a couple of special times in the year when we might receive lump sums, such as a tax return or an annual bonus,” says Kylie Douglass, Acting Head of Mobile Distribution at Bendigo Bank.
“Instead of spending that money on treating yourself, which is very tempting, you could use it to reduce your home loan.”
Even ad hoc payments can make a huge difference by reducing the interest you pay in the long run. It’s worth checking with your lender, however, whether any fees or restrictions apply.
