Lower mortgage rates often allow a homeowner to pay off mortgages in advance. However, you’ll need to determine if that’s a good idea or not. You may explore certain other alternatives like that of investing a portion of your extra income in a 401(k). You may pay off your mortgage earlier if you haven’t applied for any academic aid for kids based on your need.
Consider a few good ways for paying off your mortgage earlier:
Opt for short-term mortgage refinancing
You may consider refinancing into some 15-year or 10-year mortgage for paying off your mortgage within a short-term. Let’s assume you have a mortgage for $200,000 at a fixed rate of 4.5 percent for 30 years. Suppose, after a period of 5 years you agree to refinance into a loan for 15 years at a rate of 4 percent. By doing this, you’re actually paying off your mortgage some 10 years in advance and it will help you save a little over $60,000 with the exclusion of your refinance closing costs.
Compared to all 30-year term mortgages, those with shorter terms come with interest rates between quarter and three-quarters of the percentage point. But you’ll need to bear the closing costs when it comes to a mortgage refinance. The value of monthly payments is bound to become higher when you opt for a quicker payoff. In case you don’t have adequate money to pay for your mortgage on a particular month, then you’d be locked in. You should only consider refinancing if the old interest rate is higher than the new rate.
Pay an extra amount every month
If you can afford to pay a little more every month, then you may enjoy the benefits of an advance payoff without having to worry about the additional refinance costs. You may recalculate your monthly payment by enjoying the fruits of an advance payoff without bearing any extra charges for refinancing your mortgage. The interest and the principal amount that you pay every month have to be divided by 12 and added to your monthly payment for up to 12 months. For all these 12 months, you’ll be making about 13 payments.
By doing so, you’ll end up saving an amount over $18,000 in terms of interest and get your mortgage paid off in advance by about three years. To get your additional payments adjusted properly with your loan, you’ll need to get in touch with the mortgage servicer. Just to make sure that your payment has been adjusted properly, you ought to pay more attention to the following statement. Let your servicer know how eagerly you’re trying to repay and seek out the best repayment options.
Make an additional payment every year
It might be in your interest to bear an extra monthly payment every year instead of paying an extra amount every month. You may continue to save an amount worth 1/12th of your monthly payment each month, which you can pay once every year.
You may try doing this for the very first month after you achieve your mortgage for $200,000, which is distributed over a 30-year term with an interest rate of 4.5%. You’ll end up saving an amount worth $27,000 in terms of interest and your mortgage will be repaid by about 4 years in advance.
You may get your money directed towards the mortgage regardless of whether you’re experiencing an unforeseen windfall, some tax refund, or achieved a bonus for your performance at work. However, you must take care of your other financial needs in advance. For that, you’ll need to assess your entire financial situation and achieve a true picture.