Pay Down Your Mortgage Balance and Build Financial Security
Home ownership is a cornerstone of the American Dream. However, you don’t truly own your home until you pay off your mortgage.
It is prudent to set a goal to pay off your loan before you retire, when your earnings can drop significantly. Having no required monthly mortgage payment can help you in various ways:
- Reduce your stress: When you are no longer obligated to pay your largest monthly bill, you eliminate worries and concerns that some emergency or unforeseen event will cause you to miss payments and put your home at risk.
- Increase your options: Once your mortgage is paid off, you can continue to live in your home, paying only your property taxes, homeowner’s insurance, and maintenance. You have the freedom to move to another city or down-size to another residence where you live.
Review Your Finances
Before you commit to any strategy, make sure to fit your mortgage into your overall financial picture.
- Budget: Will you be stretching yourself by putting more money into your home each month? The riskier it is to increase your payment, the more reason to employ on of the strategies below that gives you greater flexibility.
- Savings: Have you already built up a rainy-day fund? Make sure that you build a solid base- before you focus on paying off your mortgage faster.
- Retirement fund: How much are you contributing to your retirement? It may make more sense to put money into a retirement fund, depending on your age and what you’ve already built up, than to prioritize paying down the principal on your mortgage. If your employer matches your retirement contributions, make sure you take full advantage of the match, before putting money toward your mortgage.
- Pay off debt: Paying off any high-interest credit card debt should be a higher priority than paying down your mortgage.
Strategies to Pay Off Your Loan Faster
There are different strategies that you can use to pay off your mortgage faster, including:
- Reduce Your Term Length: You can greatly reduce your overall costs by refinancing your loan for a shorter term. Interest rates are even lower for a 15-year loan than for a 30-year loan. When you shorten your loan term, it is very likely that you will increase the size of your monthly payment, so be careful you don’t commit to a payment you struggle to make each month.
- Make Extra Principal Payments: There are different ways that you can accelerate paying off the principal on your mortgage, including:
- Bi-weekly Payment: Some mortgage companies offer you the option of making biweekly mortgage payments. Don’t just send in a split payment, as your lender may not accept less than a full mortgage payment unless you formally set up a bi-weekly payment plan. Be careful to check if there is a fee for setting up this option or if there is a monthly charge. If there is, look at other options that you can do on your own without a fee.
- One extra payment a year: If add you 1⁄12th of your required monthly payment to every monthly payment you make, you will make one extra mortgage payment per year. This shaves years off the time it takes to pay your mortgage and can save you a lot of money.
- Occasional lump-sum payments: If you have extra money, from a yearly bonus or savings you’ve accumulated, most lenders and loans allow you to send in a payment directed at your principal balance. If you send in extra principal payments, you still must make each and every required monthly payment.
- Refinance to a lower interest rate: If you can reduce your interest rate, you can take the monthly savings and use it to pay down your mortgage. If you can greatly reduce your rate and you make the same payment you were making on your previous mortgage, you will pay off your mortgage far sooner and at far lower overall costs.