How to Pay Down that Pesky Mortgage
(Article provided by Kelly MacDonald)
Imagine owning your home free and clear of any mortgage liens while you are still relatively young. It is a dream of many homeowners and investors and achieving it is much easier than some people think. A little knowledge, understanding and disciplined money management will go a long way toward reaching the goal of debt-free home ownership.
With a $400,000 mortgage at 4% interest, a homeowner will pay $200,000 in interest over a typical 25-year amortization period. Think of what you could do with even a small portion of that money. While today’s interest rates are historically low, that may not be the case forever and you may wish to consider paying accelerated principal payments to pay down the mortgage and avoid paying even more interest should borrowing rates rise. If you are not sure where to begin, start by speaking to your Realtor or mortgage professional. Once we understand your general financial situation and what you are hoping to achieve, there are several options to consider toward the goal of paying down your mortgage balance.
Most institutional lenders provide for penalty-free principal prepayments on residential mortgage loans, but there may be limitations. Read the fine print in your loan documents and consult with your mortgage pro if there is anything you do not understand.
Lump Sum Prepayments
Let’s pretend you just inherited $15,000 from your beloved Aunt Nelly. A careful review of your loan documents confirms that you can make a $15,000 prepayment without incurring penalties or additional costs under your 5.45% fixed rate mortgage. Even if you never make another lump sum prepayment under your mortgage, you will go on to save $33,000 in interest over the course of the loan and have it paid in full 4 years sooner. Imagine how much money you could save with periodic lump sum payments!
Increased Monthly Payments
Many borrowers choose to pay down their mortgage quickly with voluntary increased monthly payments. Just an extra $50 a month applied to a $150,000 loan will save you $14,000 and shave 2.5 years off the life of your loan.
Refinance at a Lower Rate but Keep Making Old Payments
The next time you recast your mortgage loan for a lower interest rate, consider the option of continuing to make larger payments based on your old, higher interest rate. This simple strategy will barely make a dent in your monthly budget but may save you tens of thousands of dollars over time.
Accelerated Payment Options
Accelerated Payment Options offered by lenders are a means of paying off your mortgage sooner by making one extra monthly payment per year. Under this scenario, borrowers often opt to make 26 biweekly payments over the year in place of the customary 12 monthly payments. The resulting extra payment each year translates to a significantly reduced loan term and thousands of dollars in saved interest, depending on the size of the loan.
If your monthly budget for living expenses is already tight, think about simple, cost-saving measures you might make to redirect a portion of your income toward mortgage loan prepayments. Your bank account and your wallet will thank you.
