One of the achievements from last year that my wife and I are most proud of was the fact that we paid off an extra 15% of our total mortgage amount. We are about to make another extra payment as we continue towards our goal of being completely debt free.
This is certainly something you can achieve as well. Here are seven ways to pay off your mortgage more quickly.
1. Make a bigger down payment
Naturally, the larger your down payment the quicker you can pay off your home and the less interest you will pay. Take for example a $200,000 home with a mortgage at 5% interest over a 25 year period. There is a significant difference between making a 10% down payment and a 20% down payment. The 10% down payment results in $135,000 in interest. The 20% down payment will result in $120,000 in interest charges. That is a total of $15,000 extra you save pay making the larger down payment.
2. Get a shorter amortization period
The shorter the amortization period, the less you will pay in interest, and naturally the shorter amount of time you will have to pay off the debt. Take the example above, of the 25 year mortgage with a 10% deposit. As mentioned you would pay a total of $135,000 in interest. If instead, you reduced it to a 20 year mortgage you would only pay $105,000. If you went even further and had only a 15 year mortgage the interest charges would go all the way down to $76,000. That means nearly $60,000 is saved by having a 15 year mortgage instead of a 25 year mortgage. Certainly that means your monthly payments are higher – but not by as much as you might suspect. The difference is only about $400 each month.
3. Pay every two weeks
By breaking up your payments and making a payment every two weeks you will in effect be making two extra payments each year. In order to do this you need to make the payments half of what you would have paid monthly. This means that your extra two payments go directly onto the principle lowering your total interest and speeding up your repayment process.
4. Increase the size of your payments
One of the most important ways of paying off your mortgage is by arranging to pay more than the minimum payment. Anything you pay extra will go instantly to the principle. For example, with the mortgage described above (a 25 year mortgage at 5% for a $200,000 home with 10% down) if you simply paid an extra $100 per month you would pay off your mortgage three and a half years early and save over $20,000 in interest. If you increased the extra payment to $250 per month you would pay off your mortgage more than seven years sooner and save nearly $50,000 in interest. If you went full out and paid an extra $500 per month you would pay off your mortgage eleven years sooner (in nearly half the original time), and save nearly $75,000 in interest.
5. Don’t refinance too often
The idea of refinancing for lower interest rates, or to free up some cash for other purposes, can be a serious temptation. Unfortunately, many people get in the trap of frequent refinances and end up getting stuck in a cycle of increasing mortgage debt. It is easy to think of using increased equity in your home to do renovations or repairs. In reality these sorts of things just add to your debt without creating any real personal wealth. Refinancing for lower interest rates may seem simple enough but there are often many fees involved. If interest rates have fallen significantly it might be worth refinancing once in a while, but don’t get in the habit. If you do refinance, make sure you understand all of the fees and make sure you are going to be living in the house long enough to truly take advantage of the lower interest rate.
6. Pay extra bulk payments
Extra bulk payments can be another powerful way of reducing the time remaining on your mortgage. In our example of a $200,000 home, an extra payment of $10,000 at the end of the first year shortens the length of the mortgage by about 2 ½ years and save you over $20,000 in interest.
7. Know your policy
The important thing to do when planning to pay off your mortgage quickly is to know your mortgage policy. Your policy may have certain provisions as to how you can pay off your mortgage and what sort of payments will have a penalty attached. In our case, our mortgage allows a maximum of 15% of the mortgage to be paid in a bulk amount each year. On top of that I can double any payment that I chose, and increase my payment amount by 10% once a year. These numbers serve as goals. By knowing that I can pay a maximum of 15% of the mortgage extra each year, I have a goal to pursue. I use their standards to drive me towards success and knowing the policy well protects me from paying any extra fees.
8. Set your debt free date
Like any goal, getting out of debt requires you to have a deadline. In paying off your mortgage your deadline is the date you set as your debt free date. This is the point in time when you plan on having your mortgage burning party and being able to say that you own your house outright. Do you have a debt free date? Take some time to set one and do what you need to do to make it happen.
Now don’t forget that you can combine all of these steps. Let’s look at one final example. We’ll stick to our $200,000 home and an interest rate of 5%. Remember that the original plan has you spending $135,000 in interest and paying off your home in 25 years. To start our plan you will make a bigger down payment. You’ll make a 25% down payment instead of 10%. You’ll take a 20 year amortization instead of 25 and you will increase the size of your payments by $200 a month. With this plan you will pay off our mortgage in 15 years and spend only $63,000 in interest; a savings of over $70,000. Do you think you might be able to put that $70,000 to good use? Of course you could. Not only that, but after 15 years you are done. You can take your monthly payments and redirect them to other things such as your retirement, travel etc. It is worth it. Make the small sacrifices now to live an unbelievable future.
The Success Professor – Danny Gamache
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