Taking out a loan in your 20s or 30s and finishing the payoff in your 50s or 60s can seem downright daunting.
Nothing can trigger that sinking feeling in the pit of your stomach faster than looking at your mortgage statement and seeing those dreaded lines: “360 payments” and “Payoff Date: 2044.”
But you don’t have to adhere to a 30-year schedule. Here are six ways you can accelerate your repayment clock:
1. Refinance into a 15-year or 20-year loan
Although a 30-year mortgage is considered the normal default, most financial institutions offer the option of taking out a 15- or 20-year loan. These loans are amortized faster, which means your payments will increasingly be applied to principal reduction, rather than interest.
Contrary to popular misconception, a 15-year loan isn’t double the payment of a 30-year loan. Yes, you’ll face a larger payment — but not double. How?
Each month, you’ll divert a larger chunk of your earnings toward your principal and interest payments. The total interest paid over the life of the loan will drop since you’ll reduce principal more quickly and 15- and 20-year loans are usually granted at a lower interest rate.
2. Make payments as if you’ve refinanced
Should you refinance? Or should you simply make extra payments toward your original loan as if you’ve refinanced?
Refinancing from a 30-year loan into a 15-year loan does come with drawbacks. First, you’ll lose flexibility. If you face an emergency (like a job loss or a health crisis), you might not be able to afford the higher payments.
Second, you’ll endure another round of closing costs, which will add up to a few thousand dollars. (If you don’t have the money now, you can roll this into the new loan.)
It could take you a few years to reach the break-even point — the point at which the interest savings from the new loan outpace the transaction costs of refinancing.
It may not make sense to refinance if you’re already close to the end of your mortgage term, or if you can make extra payments to close out your current mortgage sooner. Why not? Because you won’t hold the mortgage long enough to reach the break-even point.
If you’re concerned about either of these two drawbacks of refinancing, just concentrate on making enough extra payments to squash the rest of the loan.
3. Refinance into a 30-year with a lower interest rate
If you took out a mortgage prior to the recession, when interest rates hovered around 5–6%, now may be the time to reduce that rate.
If you have strong credit and a low debt-to-income ratio, talk to your lender about refinancing into a 30-year loan at a lower interest rate. (Ideally, you’d refinance into a 15- or 20-year loan, but if you can’t afford the higher monthly payments, refinancing into a 30-year loan at a lower rate is a strong second choice.)
Once you refinance, your monthly payments will drop rather than increase. This will save you interest over the life of your loan, but it won’t accelerate your payoff date. (In fact, it may extend that date even further out.)
Here’s an effective work-around: refinance into a 30-year mortgage with a lower rate but continue making the same monthly payment you were making before. This “extra” money (the difference between your new, lower monthly payment and your original monthly payment) will get applied to the loan as an additional principal payment and accelerate your payoff date.
4. Find cheaper homeowner’s insurance
You can probably guess where this next point is heading. The lower your homeowner’s insurance premiums, the less you’ll pay each month.
Shop around. Ask if you can bundle your car and home policies to take advantage of a lower rate. Request a higher deductible.
If you can lower your homeowner’s insurance premium, your monthly mortgage payment will drop. Keep making the same payment, though, so that you can siphon this difference toward accelerating your payoff date.
5. Make biweekly payments
Instead of paying one lump sum each month, make a biweekly mortgage payment. For example, if your mortgage is $1,000 per month, make a $500 payment every two weeks.
How does this accelerate paying off your mortgage? Since there are 26 biweekly pay periods each year, you’ll effectively make one extra month’s payment every year — without “feeling” it.
6. Downsize or monetize
If you really want to be free of your mortgage, you can always downsize into a cheaper home. Sell your home and use the equity to make a hefty contribution to the cost of the new one.
If that idea doesn’t appeal to you, then monetize your existing home. Convert the basement into an apartment to rent, or build an apartment over the detached garage.
You can use this rental income to pay down the mortgage. Yes, dealing with renters comes with its own challenges — but a fully-paid mortgage might be worth it.