For many of us, the biggest financial obligation we have is the mortgage. While some people don’t mind plugging away at the mortgage for 30 years (especially if the interest rate is low and they want to invest), others are interested in paying of the mortgage off as quickly as possible.
Neither way is “best” it just depends on your specific financial situation and how you want to approach your mortgage. For some people, it doesn’t make sense to pay extra towards their mortgage. They can better use their money towards other debts or putting it in their investment portfolio.
If you are in the camp that prefers to pay off the mortgage as quickly as possible, there are a few strategies you can use to get to the point where you can truly say that you own your home:
1. Get a 15-Year Mortgage Instead of a 30-Year Mortgage
The easiest way to pay off your mortgage faster is to start out with a shorter mortgage term. Instead of getting a 30-year mortgage, choose a 15-year mortgage. Even if you can’t quite swing the payment for a 15-year mortgage, you might be able to make a lot of progress with a 20-year mortgage.
In any case, if you want to start off on the path of paying off your mortgage at a rate that is faster than average. Just make sure that you can truly handle the monthly payments.
Before you take on a shorter mortgage loan, take a long and hard look at your budget and your finances. As you can guess, there is going to be a significant difference in the size of the monthly payments between a 30-year loan and a 20 or 15-year mortgage.
While you might be able to afford a shorter loan, you want to ensure the monthly payments are not going to stretch your budget too thin. You want to have some cushion in case there are any emergencies pop up.
2. Get a 30-Year Mortgage, and Make 15-Year Mortgage Payments
If you are worried about getting caught in a bind with the 15-year mortgage, you can get a “regular” 30-year mortgage and then make payments as if it were a 15-year mortgage. You can always add the extra amount to the principal each month, reducing what you owe at a quicker pace.
This strategy is preferred by those who are concerned about what might have if the financial situation changes. If you get a 30-year mortgage, with its smaller monthly payment, but pay extra each month, you have a little breathing room in the event of a financial emergency.
3. Refinance to a Shorter-Term Mortgage Later
Perhaps you don’t feel as though you can handle the payments on a shorter-term mortgage right now, but think that you might be able to do it later. This can be one way to save money and pay off your mortgage at a faster rate. Refinancing to shorter-term mortgage — especially if the rate is lower — can help you get rid of your mortgage that much faster, while at the same time saving tens of thousands of dollars.
Depending on how long you’ve had your mortgage or the original interest, you could save a lot of money on your mortgage interest payments. The less you’re paying in interest, the more you can pay towards the principal. There are thousands of different companies you can choose when you’re looking for a mortgage refinance.
If you’re wanting to pay off your mortgage faster, there is nothing wrong with checking to see if you can refinance. Maybe when you bought your home, your credit score wasn’t the best or your salary is much higher than it originally was. You could get a drastically lower interest rate.
4. Keep Your Original Payment after Refinancing
Another option is to refinance your mortgage to a lower rate, and just refinancing for the same number of years you have left on your loan (or a little longer). Instead of paying the new, lower payment, though, keep making your original payment. You already know that you can afford that payment, so keep making it. More of your payment will go to principal, and you will accelerate your mortgage payoff. And you have the benefit of wiggle room if you run into financial problems.
5. Bi-Weekly Payments
You can squeeze in an extra payment each year without too much effort simply by switching to bi-weekly payments. You pay half your monthly mortgage payment every other week. This means that, some months, you make three payments. Because, with 52 weeks a year, you make 26 payments. If each month had four weeks exactly, there would be 48 weeks in the year, and you would make 24 payments. But, since that isn’t the case, two extra half-payments add up to an extra payment each year, and that can make a difference over time.
Why Pay Off Your Mortgage Faster?
One of the most common reasons people pay off their mortgage early is because they don’t like debt. It’s more of an emotional decision and less of a financial decision. This is especially true for older homeowners. These people might have better options for their money, but they are more concerned with eliminating the debt. There is nothing wrong with this decision if this is what would make you more comfortable.
Another benefit of paying extra on your mortgage is there is no risk. If you invest the extra money, there is a risk involved with those investments. As long as you’re putting extra money down on your mortgage loan, there is no additional risk. Paying off your mortgage has a clear ROI.
If you don’t have a mortgage payment, then you have more free money for other purposes, like college tuition. Instead of having the money tied down to a mortgage payment every month, you can use the money for other important reasons. Having some financial freedom in how you can use your money every month is never a bad thing. If you have a mortgage payment, you don’t have a choice in where that money goes every month.