Let’s face it, paying down one’s mortgage is not an easy task. It requires commitment, dedication, and lots of knowledge and education to make sure you’re employing the right tactics and strategies to pay it down. Luckily, I’m here to help! It’s important to have a general understanding of how mortgages work so that you can make choices regarding paying it off that work the best for you. This means we need to talk about the concept of amortization.
Amortization is defined as the process of spreading a loan out into a series of fixed payments. Investopedia defines amortization as “…paying off debt over time in regular installments of interest and principal sufficient to repay the loan in full by its maturity date. With mortgage and auto loan payments, a higher percentage of the flat monthly payment goes toward interest early in the loan. With each subsequent payment, a greater percentage of the payment goes toward the loan’s principal.” If this sounds overwhelming, perhaps try looking at an amortization schedule in order to visualize how it works, or ask your loan officer any questions you may have – we are always happy to help!
Shorter Term Loan – while this suggestion may seem obvious, some people may not realize that a 30-year fixed mortgage isn’t the only option that is available. There are many choices that one can make, and it’s important to consider more than one and take time to think about your long-term financial goals when you’re shopping for a mortgage. As an example, I’ll compare a 30 year mortgage and a 15 year mortgage, both at a 4.5% fixed interest rate, borrowing $200,000.00. The shorter loan term actually saves money in the long run!
Let’s look at the numbers:
30yr Monthly Payment: $1,300.37.
Total Interest paid over 30 years: $164,813.42
15yr Monthly Payment: $1,530.99.
Total Interest paid over 30 years: $75,397.58
This means that the same exact loan amortized over 15 years instead of 30 saves you $89,414.84
In this example, you’re saving more than half the money you would have been paying in interest. Make sure to ask your loan officer to show you more than one option when it comes to loan terms – it may save you in the long run!
Apply excess funds to mortgage debt. This is probably one of the easiest actionable steps that you can take. Whether it is 5, 10, or 100 dollars, putting it towards your mortgage is still making a dent in the overall total. Did you know that paying an extra $10 every month knocks 9-13 months off of mortgage payments? With that in mind, paying an extra $100 every month knocks 6-8 years off mortgage payments! If you’re going to use this tactic, however, it is imperative that you earmark this money for payments on the principal. When you are making that monthly payment, ensure that it’s for the principal!
Make bi-weekly payments. This is an easy to implement and fairly common strategy. For a bi-weekly payment, you would be making your mortgage payment every two weeks, rather than once a month. This helps tremendously because in doing this, you actually end up making an extra mortgage payment every year! You must be ahead in your mortgage payments in order to implement this, and you need to make sure that your mortgage company offers this option. If you are able to implement it, it can be an easy way to pay down your mortgage faster!
Make large principal reduction payments. The more you pay down your principal, the quicker your mortgage is paid off – it really is that simple! If you are paying more money towards the principal, you are reducing the debt owed, which reduces the amount of time it will take you to pay it back.
Refinance, if you are able to. This advice can be tricky, as it really only makes sense to refinance if you will see a significant monthly drop in payments, or if you are able to ditch private mortgage insurance. If you can, then this option is definitely worth exploring! Sometimes refinancing can cost money, so you need to make sure that your savings are enough to justify the cost associated with it.
I hope this advice has brought you some clarity on ways to pay down your mortgage quicker. If you have any questions, feel free to leave them in the comments below and shoot me a message – I’m always glad to help!
Loan Officer at CrossCountry Mortgage, LLC
Personal NMLS290507 Branch NMLS1754567 Company NMLS3029
Office: 177 Military East Benicia, CA 94510 Phone (510) 816-2904 Email firstname.lastname@example.org
6 YEARS IN A ROW!