How to Pay Off Your Mortgage Faster (That’s The Goal!)
Owning a home is clearly number one on the wish list for many of us. However, owning a home outright is a close second.
From a financial perspective, paying off your mortgage faster is a smart move.
I know this was a personal goal for me and my husband and we managed to pull it off by the age of 40 â€“ pay off our mortgage here in a city where house prices are absolutely outrageous.
One of the biggest bonuses of being mortgage-free is that it allows you to decrease your monthly expenses dramatically and enables you to finally give your retirement, children’s college fund, and day-to-day savings account the attention they deserve.
If you have a mortgage yourself then you will know that throughout the first few years of your mortgage, the majority of your payments will go towards interest.
These tips can help you avoid the interest-trap and work towards living the mortgage-free life you deserve:
1 – Choose a 15-year fixed or variable rate mortgage.
Most home-buyers choose a 30-year fixed rate mortgage because it allows them to pocket several hundred dollars more than a 15-year term each month.
While this may be a sensible option, if you are financially able to cover the extra payment amount or so in your bank account, choose the shorter amount.
Let’s take a look at the figures:
- If you take out a loan for $200,000 at an interest rate of 6% for 30 years, your monthly mortgage payment will be $1,199 and you’ll pay over $231,000 in interest throughout the course of your mortgage.
- If you take out a loan for $200,000 at an interest rate of 6% for 15 years, your monthly mortgage payment will be $1,688 and you’ll pay just over $103,000 in interest throughout the course of your mortgage. Can you see the difference?
- Though a 15-year term will force you to pay a higher amount each month, you’ll be free from paying a mortgage in just 180 months and you’ll save $100,000 or more in interest payments.
- I have personally found that it is forces you to save more money â€“ that would have otherwise been spent on things you didn’t really need.
- 15 year fixed rate mortgages often also boast lower interest rates because the lender assumes a lesser risk than a 30-year mortgage term.
2 – Make regular lump sum payments.
My husband and I always, always deposited any extra money we had into our home loan, towards the principal.
Please make sure that your home loan allows for extra payments and allows you to pay off the loan sooner than the expected finish date.
- Apply your Christmas bonus towards making this extra lump sum payment. Or any extra cash bonuses or tax refund money you receive. No, it is not a wasteful decision (if you feel tempted to spend the bonus on fun stuff instead. Being debt free is more fun than any material possession you could purchase on a whim!) Choices like this will ultimately help you become debt-free sooner rather than later.
- Lump sum payments can be made at any time of the year you choose. If your lender sets restrictions as to how many times per year you can make lump sum payments then just make sure to consciously put that money aside in another account and transfer the amount over when allowed.
3 Schedule extra weekly payments against the principal.
As stated above, in the early days the majority of your mortgage payment will go towards interest, which sort of sucks!
Ideally you want to be able to send extra payments that are applied towards the principal; in many cases up to 75% of your payment is applied towards interest.
- By doing this, you will not just continue to pay your interest but heavily decrease the amount you owe on principal over the course of just a few years.
- Obviously you should only pay off as much as you can afford. It makes little sense to unnecessarily dig yourself into a financial hole.
- Remember every little bit counts! If you put aside $25 a week, that equals $1300 a year. Double that to $50 savings for an extra $2600 off your mortgage.
- Many people opt to send additional biweekly or weekly payments towards the principal (double check that this can be arranged), but there is security in taking this approach.
- If your income decreases, or if other expenses increase, you can stop making extra payments towards your principal at any time without penalty.
Other options to pay off your mortgage faster include:
- Arranging an off-set account
- Refinancing your home â€“ sometimes it pays to look beyond the big banks
- Renegotiate your loan
- Having your pay go straight into your mortgage and using the redraw facility to access funds
- Making your home loan a priority
- Knowing your entitlements â€“ choose a home loan that suits your needs
- Consolidating your debts
- Switching to a lender with a lower rate
- Earning more money
- Purchasing a home you can actually afford
- Renting out space within your home
- Maximizing your down payment
Hopefully these tips will help you pay off your mortgage faster.
Remember knowledge is nothing without action.
If you want to become debt free sooner, it is up to you to action the steps you KNOW you need to take. I trust you can do itâ€“ anything is possible!