3 secrets to paying off your mortgage early
Wednesday, 5 August 2015
Your home is likely your biggest investment, but financing a house or condo doesn't come cheap.
To finance $180,000–about the average price in the United States, according to Zillow–with a traditional 30-year fixed mortgage at 4 percent interest rate, you'll pay nearly $130,000 in interest. To slash that figure to smithereens, try these proven strategies:
Refinance your mortgage
This is the most common way to reduce payment terms and interest. For example, if you financed that same $180,000 mortgage with a 15-year loan and a 3.2 percent interest rate, you could save over $80,000 in interest, while paying only about $400 more per month in mortgage payments, when compared with the 30-year loan at the higher rate.
DIY accelerated mortgage payments
Instead of officially refinancing your mortgage–which can cost thousands of dollars in fees and lock you into higher payments–find creative ways to pay down the principal.
One caveat: Ask your mortgage lender about any prepayment penalties, which can vary wildly from bank to bank. One way to help pay down your mortgage is to double your principal payment. Each month, check your mortgage statement online. Note how much of your payment goes to the principal, then make an additional payment for that sum. For example, if your first payment in the 30-year, $180,000 example is $860, $260 will go to principal.
If you pay an additional $260 each month, this trick–if used consistently from the start of the loan–can cut your repayment time by over a decade.
You can also try paying just a little more each month. By adding just $100 per month to your payment in the above example, you can cut down on your repayment time by 5 years, and save at least $25,000.
Use one of the many mortgage calculators online, and see how much you can save with various repayment plans.
Surprise income? Pay extra on Mortgage to knock out principal
Instead of blowing your tax return at the casino, spending your annual bonus on a vacation, or a using an inheritance for a new car, decide right now that any unexpected or irregular income in the future will go toward paying off your home. For example, if you put that annual $2,000 work bonus towards your mortgage each year, you could pay it off over 7 years earlier and save around $38,000 in interest.
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