Get On the Fast Track of Paying Down Your Mortgage

shutterstock_143675506-750x42030 years is a long time.  How old will you be when you are done paying your 30-year mortgage?  60 years old?   70 years old? 80?  This is something to consider, especially if you are taking your mortgage with you into retirement.  If your mortgage is going to follow you into retirement, how will you prepare for that?  Below, we will explore a few methods to help minimize the length or your mortgage loan term, and get you out of debt faster.

One solution to the need of having extra money lying around is to pay down a mortgage more quickly.  Paying down a mortgage in under 30 years does have its perks, and could provide you with strongly needed cash for things such as retirement, college tuition, vacation, or home repairs.

For example, John has a $250,000 30-year mortgage loan with an interest rate of 4.25%.  If John pays an extra $100 per month on his loan, in the end he has shaved 4 years and 1 month off of the loan, and he has also saved an additional $30,000+ that he would have otherwise had to pay down on interest had he stuck to making regular mortgage payments and omitting the extra $100 per month*.  Perhaps you should speak with a loan officer about refinancing a 30-year mortgage to a 15-year mortgage.

However, it is important to be aware of all of your debts, and to be aware of all of the interest rates that each debt carries with it.  Your mortgage loan may have a 4.25%, but your credit card interest rate may be much higher.  Focus on paying down debts that have higher interest rates first.  As a best practice, focus on paying down one debt account at a time before moving to the next.

Another option is to direct only your extra cash to your mortgage.  Set aside any bonuses from work or tax refund and funnel them directly into a mortgage payment.  Every single extra dollar paid into a mortgage will pay down the debt faster, no matter how big or small.  You will thank yourself in the end that you decided to pay down mortgage vs. splurge on something that you probably won’t use for the next 30 years.  Always remember the importance of having a roof over your head.

It is very important to make decisions with foresight.  What are your goals for the year ahead?  Do you plan to remodel your home or go on a hefty vacation?  Make sure you take this into account before funneling more money into your mortgage than you mean to.  Consider what you really need the extra money for.   All of this should be discussed with a financial specialist before moving forward with any big decisions.  You might come to the conclusion that you can’t afford to make extra payments on your mortgage just yet.

Whether you can or cannot afford to make extra payments on your mortgage loan, there are still options.  Another way to pay down a mortgage faster is to split up the payments throughout the month.  Pay half of the mortgage payment at the beginning, and half at a later time of the month.  Be sure that with a payment plan like this, that you are still abiding by the payment due date.  For those of you who get paid on a biweekly basis, this goal is very attainable by setting aside portions of your paycheck and paying your mortgage down with that portion every time you receive the paycheck.  The method behind the madness of making mortgage payments twice a month rather than once a month is that it reduces the amount of interest over the duration of the loan.  To explain this through example, let’s say Mr. Smith has a $100,000 principal balance left in his loan at the beginning of the month.   This loan has a 4.5% interest rate.  His mortgage payment for the month is $506.69.  If he pays $253.34 in the beginning of the month, the portion that went towards his principal now brings the overall principal balance down.  In the middle of the month, when he pays the remaining  $253.34, his interest will be 4.5% of the $99,800+ rather than 4.5% interest on a balance of $100,000.  Therefore, if he keeps this behavior up for the remainder of the loan, Mr. Smith will be paying a significant amount less towards interest and more towards the principal balance, ultimately allowing him to pay down his mortgage balance faster.  Specifically, over the life of the loan Mr. Smith will have paid $82,406.71 in interest with an average interest of $228.91 per month had he stuck to the standard monthly payment.  However, if Mr. Smith switches to biweekly payments every month, his total interest that he will have paid over the life is the loan is $67,886.84 with an average interest of about $86.81 per month.  Making biweekly payments has the potential to save Mr. Smith $14,519.87 over the life of the loan. To see how much making biweekly payments on your balance would differ the interest paid over the lifespan of your mortgage, go to: http://www.bankrate.com/calculators/mortgages/bi-weekly-mortgage-calculator.aspx.

Be aware of the loan term that you are choosing as well.  While a 15 –year mortgage loan sounds more attractive than a 30-year loan as you will not have to be tied into a contract for a longer amount of time, and there are typically way lower interest rates on a 15-year loan vs. a 30-year loan, it is good to consider obtaining a 30-year loan and paying it off as if it were a 15-year loan.  A 30-year loan entails lower monthly payments, and allows you to make payments at a comfortable level for you.  It also allows for some wiggle room when it comes to a time of financial difficulty.

*Calculations provided by Broadview Mortgage Corporate office and confirmed by:  http://www.yourmoneypage.com/home/bigloan4a.php

If you have any questions about the information herein, feel free to reach out to the Author, Brittany Williams, at Brittany.williams@broadviewmortgage.com.  If you would like a quick preapproval Click Here, and for assistance with down payment or buyer assistance Click Here.  You are also always free to give us a call Toll Free (855) 692-7623.

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