Wouldn’t you love to NOT have a monthly mortgage payment? Just because your loan term might be fixed doesn’t mean that you can’t be debt free sooner rather than later!
Everyone knows a lot can change in 30 years. But for most homeowners, making a monthly mortgage payment is something that will usually not change (unless you paid cash, of course).
The good news is you don’t have to be tied to that payment for the full term, with 30 years being the most common length of a mortgage today. Here are some 4 “Mortgage Hacks” to cut the ties early while also lowering the total amount you’ll pay overall.
1. Refinance into shorter terms
Essentially cutting your loan term is a BIG financial step, but can pay HUGE dividends if you can pull it off. Not only will you rewarded with a lower rate, but you’ll also pay significantly less in interest over the lifespan of the loan. BIG money savings!!
Other loan terms to refinance include a 20-year, 15-year, and even a 10-year loan. But keep in mind that the challenging part is the fact that you’ll have larger monthly payments with a shorter loan term (i.e. going from a 30-year to 15-year).
One trick if you’re not completely confident in your ability to commit to a higher monthly payment is to make additional payments towards the principle so you can get the same effect by paying your balance down quicker!
2. Refinance into a lower rate but keep payments the same
Refinancing your loan but keeping your payment the same means that you will pay less in interest over time AND create a shorter path to mortgage freedom. However, make sure you do some research before refinancing because there are costs involved.
Typically, closing costs are lower than if you were to purchase a new home – but they are still an expense you can afford to miss! Usually, the idea is that your new interest rate should be low enough to negate the cost of refinancing altogether.
3. Get rid of PMI “Private Mortgage Insurance”
If you put less than 20% down when you purchased your home, odds are, you are paying PMI (which happens to be one of several hidden costs of buying a home.) PMI is intact to protect the lender in case of default. This extra monthly cost, while usually small, can certainly add up over time – especially since it does not get applied to your principal balance.
You can usually request to get rid of PMI once you reach an 80% LTV ratio, but the lender is required to remove it after you’ve reached a 78% LTV ratio. If you don’t feel like waiting, you can certainly speed up the process by either:
- Making additional principal payments each month -OR-
- Doing upgrades to increase value, then get another appraisal -OR-
- Get a new appraisal if you feel your home has significantly increased in value
Of course, it could always be a combination of the items above.
4. Make additional or increased principal payments
Get a nice bonus check? Maybe a nice inheritance? Or did Uncle Sam give you a Tax Refund this year? While most people have the tendency to go spend that money, maybe you could think about applying a chunk of it towards your mortgage principal. This way you don’t affect your monthly budget while still saving potentially thousands of additional dollars each year.
Another popular option is to just apply additional small principal payments each month, which ultimately add up over time! Example:
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 – yikes! By simply 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 6 years sooner.
One common trick some lenders will suggest is to make biweekly mortgage payments (this equals out to 26 half-payments) which is equivalent to 13 mortgage payments. Regardless, you have to decide what works best for you.