There is a known phrase you may have heard “rent is dead money.” This saying came about because rent money goes into someone else’s pocket. When you pay rent, someone else profits. It’s similar to the phrase, “your rent bills are someone else’s passive income.” Both these phrases hit the same note: rent is not an investment for the future. This is why we advocate for buying a home and getting a mortgage – all the monthly payments help build equity in your home! So with that said, how can a homeowner pay off your mortgage faster?
You can pay off your mortgage faster by refinancing using a lower interest rate and making extra monthly installments. The goal as a homeowner is to not only pay less interest but also pay down the principal as much as possible. This blog post will go over six tips for paying off your mortgage faster.
1. Make extra payments
One of the best ways to pay off your mortgage faster is to make extra payments. You can either choose to make an additional payment each month or a lump sum payment once a year. If you opt for the monthly option, be sure to include it in your budget and automate the payment, so you don’t forget.
Another way to make extra payments is by using a bi-weekly payment plan. This plan involves making half of your monthly mortgage payment every two weeks. By doing this, you will make one extra payment each year.
If you can make extra payments, shave years off your principal mortgage, build equity in your home, and save thousands of dollars in interest. For example, if you have a 30-year mortgage for $200,000 at an interest rate of five percent, making biweekly payments instead of monthly payments will save you more than $16,000 in interest and shorten the term by four years.
2. Refinance your mortgage into a lower interest rate
Refinancing with a lower interest rate is another way to pay off your mortgage faster. You get a new loan at a lower interest rate than your current mortgage when you refinance. This lowers your monthly payment, which allows you to pay off your mortgage principal faster.
Refinancing is not for every homeowner, so be sure to speak with a qualified loan officer to see if it makes sense for you. You can use a mortgage refinance calculator to estimate how much money you could save. By refinancing, you can refinance your mortgage at a lower interest rate. Then you can pay off your mortgage faster. In some cases, you can shave years off of the original term and save thousands of dollars in interest payments.
If you can refinance, be sure to speak with a qualified loan officer to see if it makes sense for you. You can use this mortgage refinance calculator to estimate how much money you could save by refinancing your mortgage.
3. Refinance your mortgage into a shorter-term loan
One of the best ways to pay off your mortgage faster is by refinancing it into a shorter-term loan so that your monthly mortgage payments are larger each month. This will pay down your principal faster and you will pay less interest over the life of the loan. For example, if you have a 30 year fixed rate mortgage on your home and want to refinance it for 15 years instead, then every time you pay your loan, it will go towards the 15-year portion instead of the 30.
This is one of the best ways to pay off your mortgage faster because you can make more payments each month and be done with your loan sooner than later. Just remember that there are other costs involved when refinancing into a shorter-term loan, such as closing fees and appraisal costs, so make sure you are aware of those before refinancing.
4. Make a large lump sum payment
Another way a homeowner can pay off your mortgage faster is by making a large lump sum payment. This can be done either once or over time.
For example, if you have an extra $20,000 lying around, or inherited, or received a bonus, you could make a one-time payment that would significantly reduce your mortgage balance and shorten the term of your loan. Paying a huge amount at once also helps you to lock in a mortgage rate.
You could also make smaller payments over time. For example, if you contribute $100 per month to a special saving account for your mortgage, you could shave four years and two months off the life of your loan.
Making a large lump sum payment will help you pay off your mortgage faster. You can do this either by making one big payment or making small payments over time.
5. Pay your mortgage with a credit card
You can also use your credit card to pay off your mortgage faster. You can use any rewards-earning credit card that offers cash back or points and then charge the monthly payment to the account instead of using your bank’s debit option.
For example, if you have a six percent cash back American Express card, charging the entire $800/month payment would earn you nearly $480 in cashback annually. This could be enough to cover several years’ worth of property tax payments or even help you pay off your mortgage entirely.
6. Increase your monthly payment
By increasing your monthly payment, you can pay off your principal mortgage faster. While this may be difficult, it will help you get ahead on loan and shave years from the term if you can make a larger amount each month.
For example, instead of making a $1000/month payment for 30 years at an interest rate of five percent annually (with no extra payments), paying an additional $50 per month can reduce that term down to 25 years while saving nearly $23,000 in interest. This approach could also allow you to pay off the house within 15-years with one-half of today’s regular principal & interest payment due every two weeks.
You can increase your monthly payment to pay off your mortgage faster. This may not be easy, but even Dave Ramsey has recommended it in the past!
7. Use a home equity loan to pay off your mortgage
A home equity loan (HEL), also known as a second mortgage, is one that you take out against the value of your home. For example, if you have a $200,000 mortgage and your home is worth $300,000, you could take out a $100,000 home equity loan and use it to pay off your mortgage.
This approach can be helpful because the interest rate on a home equity loan is usually lower than the interest rate on a mortgage. It can also be beneficial because you are using the money you already have saved up in your home.
These are seven tips that can help you pay off your mortgage faster. By following these tips, you can save yourself money and shorten the life of your loan. Be sure to speak with a qualified loan officer to help you with the convenient ways to pay off your mortgage faster.