Paying off your mortgage early can free up money in your budget and give you the peace of mind that comes with owning your home free and clear. But how can you actually pay it off early? (iStock)
For many families, their mortgage is the single biggest payment they make each month. And once that mortgage is paid off, you free up a lot of extra money in your budget. Not only that, but you have the peace of mind of knowing you own your home, free and clear.
Once you’ve paid off your mortgage, you can use that money for other important goals like sending your child to college or buying a rental property. Plus, paying off your home loan will drastically reduce your monthly expenses, making it easier to retire.
But how do you pay off your mortgage early? We’ve rounded up five of the best tips to help you become mortgage-free faster.
And if you’re in the market for a home now, visit Credible to get prequalified rates without impacting your credit score.
SHOULD I PAY OFF MY MORTGAGE EARLY?
How to pay off your mortgage faster
1. Refinance your loan to get a lower interest rate
Mortgage interest rates have reached historic lows throughout the past year as a result of action by the Federal Reserve during the coronavirus pandemic. Many homeowners have taken advantage of these low rates to drastically reduce their mortgage rates.
With a lower interest rate, you’ll have a lower monthly payment and more money available in your budget each month. You can put that savings toward your principal to pay off your mortgage early.
Visit Credible to see current refinance rates and see whether you could get a better deal on your mortgage.
MILLENNIALS ARE HURRYING TO REFINANCE THEIR MORTGAGES — HERE’S WHY
2. Refinance from a 30 to a 15-year loan
Most people opt for a 30-year mortgage, but you also have the option of a 15-year loan. If you’re already on a 30-year loan, refinancing to a shorterterm will help you pay off your mortgage faster. Not only does this result in you being mortgage-free in half the time, but you’re also eligible for considerably lower interest rates. If you can’t quite swing the payments on a 15-year loan, you can also seek out lenders that offer 20-year refinance loans.
An online refinance calculator can help you determine whether a 15 or 20-year loan would fit within your budget.
IS A 15 OR 30-YEAR MORTGAGE REFINANCE BETTER WITH TODAY’S RATES?
3. Switch to biweekly mortgage payments
Switching from monthly to biweekly mortgage payments can help you to pay down your mortgage faster. Rather than making 12 full payments over the course of the year, you actually make 26 half-payments, which amounts to 13 full payments. Depending on your interest rate, this could help you to pay off your mortgage around five years early.
BEWARE MORTGAGE PREPAYMENT PENALTY FEES WHEN REFINANCING
4. Put windfall money toward your mortgage
You can pay down your mortgage faster with small windfalls you get throughout the year. Roughly 70% of Americans receive a tax return each year, with the average refund equaling several thousand dollars. Depending on the size of your mortgage payment, using your tax return to pay down your mortgage could amount to one or more full payments.
Many Americans also receive one or two extra payments throughout the year. For those workers who are paid either weekly or biweekly, there are several months through the year where you get an extra paycheck, which could be used toward your mortgage.
CAN REFINANCING HURT MY CREDIT SCORE?
5. Eliminate PMI and put extra savings toward your principal
While a 20% down payment is the gold standard in home buying, it’s not realistic for many families. Instead, many borrowers buy a home with a smaller down payment and pay private mortgage insurance (PMI) each month.
Depending on the size of your mortgage, PMI may cost hundreds of dollars per month. And while it falls off automatically once you reach 78% equity in your home, you might be able to get rid of it earlier. It may be as simple as making a formal request to your loan servicer. Then, you can use those extra savings each month to pay a little extra on your mortgage.
And while it’s not necessary to refinance your mortgage to eliminate PMI, that can be a great option for many homeowners. Refinancing can give you the benefit of removing PMI, while also taking advantage of today’s low interest rates.
Visit Credible to find out if you’re eligible to refinance to a lower rate than you currently have.
HOW TO LOWER YOUR MORTGAGE PAYMENTS DURING COVID-19
Next steps
Paying off your mortgage early can provide you both emotional and financial freedom. Not only do you free up money in your budget, but you have the peace of mind knowing you aren’t indebted to anyone.
Are you considering refinancing your mortgage to get a lower interest rate or shorten your loan term? Visit Credible to get in touch with an experienced loan officer and get your mortgage refinance questions answered.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.
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