If you’ve decided that you want to remain in your home for the long term, then you’d probably love to pay it off long before the 30 years – or 15 or 20 if you opted for a shorter term.
Unless you had cash with which to buy your home, you know you’ll be paying a house payment no matter what. It will either be for your house or for a house belonging to your landlord. But when you think about all the interest you’ll pay over the life of the loan, it’s still painful!
Paying your loan off early means paying less interest, so consider these options:
Add a few extra dollars to each payment. I have a friend who shortened her car loan by about 5 months simply by adding $3.24 to each payment. She rounded the payment from $271.76 to $275. That was painless.
If she’d added $13.24 the term would have been even shorter.
However, if you can afford it…
Add an extra payment to each payment. And no, I don’t mean make double payment. Just double the amount of the payment that is going toward the principal. Here’s an example:
An actual home loan with an interest rate of 3.625% carries payments of $1,632.53 per month. Since the loan is only a few years old, the amount going to the principal each month is only $427.09. That means paying $2,059.62 is equal to paying two payments. A payment of $2,486.71 would effectively make 3 payments.
As time goes by, you’d have to increase that amount, because more of each payment will go to principal as less goes to interest. But you’d still reap the benefit of shaving a few interest-bearing months off your loan early on.
The beauty of these methods is that you can do it when you can afford it, and not do it if you need the money for car repairs instead.
Make one extra payment a year. If you receive a Christmas bonus or get a tax refund each year, consider putting that money toward an extra payment on your loan. In the example above, that one extra payment added to your regular payment would be equal to making 3 extra payments.
Create your own amortization schedule.
If you’d like a bit more structure, first decide how soon you want to pay off that mortgage. Then go on line to find an amortization schedule and plug in your numbers. You’ll learn what your new payment would need to be (minus the taxes and insurance) to pay off the loan in that amount of time.
With any of these methods, be sure to fill out your payment coupon or screen correctly. When you pay extra money, designate it to go to the principal of your loan.
Refinance to a shorter term loan.
While this method might lock you in to a higher payment each month, it has advantages.
I say “might” because one of the advantages is that if you have an FHA loan and now have 20% equity, your refinance to a conventional loan will remove your mortgage insurance premiums.
Second, since shorter term loans generally carry lower interest rates, you may be able to refinance at a lower rate.
Refinancing does come with costs, so talk it over with your mortgage broker and get all the facts before making a decision.
Before you make a decision on paying your mortgage loan off early…
Consider the rest of your financial situation. Would those extra dollars be better spent somewhere else? For instance, if you have credit card debt, or any other higher interest loans, they should be paid off first.
Are you saving for retirement or for your children’s educations? Do you have some money set aside for emergencies – or opportunities?
Would you like to talk it over with a professional?
Then call us today at Homewood Mortgage, the Mike Clover Group. We’ll be glad to show you the facts and figures regarding a refinance – or to help you cerate your own new amortization schedule.
We offer fast, friendly service, combined with some of the lowest rates and best terms available anywhere in Texas.
Call us today at 800-223-7409