A lot can happen in 30 years. Kids become adults, jobs change, and life goals are accomplished and reset. Change during such a lengthy period is inevitable. But if you’re a homeowner, there’s one thing that won’t change: Your obligation to make a monthly mortgage payment.
The good news? A loan term doesn’t have to dictate when you free yourself from this financial commitment if you are determined to pay it off sooner rather than later. There are a few tried-and-true ways to cut the ties early while lowering the total amount paid in the process.
1. Refinance into a 15-year mortgage.
Cutting your loan term in half is a big financial step, but the benefits are substantial. Not only will you shorten the payoff time, but you’ll also be rewarded with a lower rate and pay significantly less in interest over the life of the loan.
The key here is determining whether you can shoulder a larger monthly cost that comes with a 15-year mortgage. If you’re not completely confident in your ability to commit to a higher monthly payment, challenge yourself to make payments you would be making if you had locked into a 15-year mortgage. Then, if financial circumstances change, you still have the flexibility to return to a lower monthly payment.
2. Refinance into a lower rate but keep payments the same.
The benefits of refinancing your loan but sticking to the same payments are twofold: You will pay less in interest over the life of the loan and create a shorter path to mortgage freedom. Plus, it’s not as drastic as jumping from a 30-year mortgage to a 15-year mortgage. However, it’s important to do a bit of research on how to refinance.
Closing costs for refinancing are generally lower than if you were to purchase a new home, but they’re still an added expense. Your new interest rate should be low enough to negate the cost of refinancing, or you should be planning on staying put long enough to reap the benefits of a smaller rate. (Use the Trulia refinance calculator to see if this is a good choice for you.)
3. Get rid of private mortgage insurance (PMI).
If you financed more than 80% of your conventional mortgage, chances are, you are paying private mortgage insurance to protect the lender in case of default. Redirecting this amount — usually 0.05%–1% of the loan amount annually — to the principal on your mortgage can have a big impact over time.
You can request to get rid of PMI once you reach an 80% loan-to-value ratio, but the lender is required to remove it after you’ve reached a 78% loan-to-value ratio. You can speed up the process by increasing your equity through home upgrades, or, if the home has already increased in value for other reasons, you can opt to refinance. Some lenders may even allow you to get an appraisal to show the new value and your increased equity — without paying for a refinance.
4. Put those windfalls to work.
Maybe your monthly budget doesn’t have wiggle room and paying the costs to refinance isn’t in the cards. There’s another option.
Tax returns, bonus checks, and inheritance payments present the opportunity to pay off a chunk of your mortgage without feeling the pain in your monthly budget. This could mean thousands of additional dollars chipping away at this massive financial responsibility each year. Sometimes your money could be better spent elsewhere — like paying off high-interest debt — but if wiping out your mortgage early is a priority, this is a great place to start.
5. Make extra or higher principal payments.
Additional small principal payments add up over time! On a $150,000 loan for 30 years at 3.75%, with no additional payments, more than $100,000 will be paid in interest over the course of the loan. By adding just $100 per month in principal payments, the total interest paid is reduced by nearly $25,000 and the loan will be paid off more than six years sooner!”
Another way to do this is by making biweekly mortgage payments. Instead of making 12 monthly payments, this equals out to 26 half-payments — or 13 full payments — per year. But beware, explains Harper, not all loan servicers make it easy to apply these extra payments to the principal. Make sure to speak to yours and ensure they aren’t simply holding on to the extra money and applying it toward the interest.
Choose the option that fits best with your current financial situation and any possible changes you foresee. If you have a steady income that will last in the long term, will last in the long term, a shorter refinanced term might make sense. If your income is a bit less consistent, you may want the flexibility of making additional payments when you can.