When you already have a mortgage with a loan but you are trying to figure out how you can pay it off earlier, you will be glad to know that you have different alternatives.
While most people tend to assume that the only way they have to pay off their mortgage earlier is by increasing their monthly payments, this is not true. There are other ways that may be a better solution for you.
Different Ways To Pay Off Your Mortgage Earlier
#1: Put More Money Toward Your Mortgage
When you are looking to pay off your mortgage faster, you should consider putting extra money toward your mortgage. However, in order to do this, you need to ensure that your contract allows you this operation. As you may already know, there are some types of mortgage loans that don’t allow you to pay off your mortgage earlier unless you are willing to pay for high fees.
With that being said, your mortgage contract may allow you to:
– Increase The Amount Of Your Monthly Payments:
The reality is that just a small increment on your monthly payment total can be enough to pay off your mortgage earlier.
One of the things that you need to keep in mind is that you can only increase your monthly payments by a certain amount each year. This amount will need to be added to your mortgage contract by writing. In case you want to increase your monthly payments over the amount established, then you may need to pay a prepayment penalty.
Notice that as soon as you increase the amount that you will be paying each month, you shouldn’t be able to lower it down up until the term of the loan.
Let’s say that you have a mortgage of $350,000 with a term of 25 years. Under these conditions and considering a fixed interest rate of 4%, you pay $1,841 each month to your lender.
Let’s now assume that you want to add more $100 to your monthly payments. However, before you talk to your lender, you want to do the math and determine how faster you will be able to pay off your mortgage.
With just this $100 increment on your monthly payments, you would be saving more than $19,000 and you would be paying off your mortgage 2 years earlier.
– Make A Lump Sum Payment:
Another option that you have is to make a lump-sum payment aside from your regular mortgage payments.
Notice that this amount is usually limited and it will need to be written in your mortgage contract. In case you want to make a higher lump sum payment, then you may be subjected to a prepayment penalty.
In case you are considering making a lump sum payment, then you need to know that you can do it at the end of your term, before the end of your mortgage term, on specific dates described in your mortgage contract or on specific occasions during your mortgage contract.
Let’s say that you have that same $350,000 mortgage loan with a term of 25 years. During this year, you were able to save $10,000 that you want to put toward your mortgage. So, you decide that you are going to make a lump sum payment at the beginning of your term’s second year.
When you look at your mortgage contract, you see that you can only make one lump sum payment per year up to 10% of what you owe. In this case, this means that you can make a prepayment up to $35,000 ($350,000 x 10%).
If you wanted to proceed with the $10,000 lump sum prepayment, you would not only be able to pay off your mortgage more than 1 year earlier as you would also decrease the interest that you needed to pay by more than $15,000.
#2: Keep Your Monthly Payments The Same:
As we mentioned above, it is possible to pay off your mortgage loan faster without increasing the amount that you pay to the lender. And the solution is to renegotiate or renew your mortgage and, this way, benefit from a lower interest rate.
In this case, you will have two options: you will be able to reduce your monthly payments or you may be willing to maintain the same monthly payment but pay off your loan faster.
Let’s assume that your main goal is to pay off your mortgage faster. So, returning to our initial example of a mortgage loan of $350,000 with a term of 25 years.
Let’s say that you have a 5% interest rate for the first five years which means that you need to pay $2,036 every month to your lender. Assuming that the 5 years period ended, you may take this opportunity to renew your mortgage. Let’s say that the interest rate now is at 4% instead of the initial 5%.
This means that for the remaining 20 years of mortgage loan that you still have ahead of you, you can now decide if you want to lower your monthly payments to $1,872 or if you want to maintain the same amount that you used to pay up until now ($2036).
Assuming that the interest rate for the rest of your mortgage loan was going to be 4% and that you want to maintain your initial monthly payments of $2,036, then you would e able to pay off your mortgage more than 2 years earlier and you would be saving near $18,000.
#3: Choose An “Accelerated” Option For Your Mortgage Payments:
The last alternative that you have to pay off your mortgage loan earlier is to opt for an accelerated payment.
An accelerated payment can include making biweekly or weekly payments besides continuing to pay the same monthly amount. So, what is the gain here?
The main benefit of using this option is to save money on interest charges. The reality is that when you decide to accelerate your payments, you will be paying one extra month every year.