It may seem like a standard thing to do: get a mortgage and pay it through the duration of the loan terms. Refinance if rates drop and extend the loan. In fact, with refinancing, the monthly savings often end up costing you more in interest and added fees in the long haul.
As daunting as it can seem, you can pay off your mortgage well before the typical 30-year term. Here are…
3 Strategies to Pay Off Your Mortgage Faster in San Bernardino, Riverside, and San Diego Counties.
Make Extra Principal Payments
You may be comfortable with your monthly budget and don’t want to commit yourself to regular extra payments. It doesn’t mean you can’t make extra principal payments that pay down your mortgage.
The majority of your payment in the early years, really the first 10 to 12 years, is all about pre-paying the interest owed on the loan. It begins to taper after nearly one-third of the loan is complete.
Call your loan servicing company to determine the process for sending in extra principal payments. Some companies require a note or special instructions otherwise the payment is applied to the next scheduled payment and doesn’t accomplish what you want.
How you send in extra payments is up to you. Some people use their tax return and send in a bulk annual payment. Others send an extra $100 or $200 at the end of the month after all bills are paid. By making what equals an extra house payment per quarter, you can reduce your loan by approximately 11 years.
The 15-Year Mortgage Option
Refinancing into a 15-year mortgage certainly, will shorten the time frame of paying off the loan. A lot of refinance options exist that usually offer lower interest rates compared to the 30-year loan. Ask your mortgage representative to run the numbers and see if the refinance makes sense. He should be able to give you the difference in cost over the course of the loan, not just what your monthly payments will be.
However, if you already have a low-interest rate and don’t want to incur costs for the refinance, calculate the estimated payment a 15-year mortgage would require. You don’t need to actually refinance – just pay it like you did.
The numbers might increase your monthly payment 30 to 50 percent but you will take advantage of your existing low-interest rate and be able to make more aggressive payments into the actual principal balance. As the principal balance drops, you are paying less interest and saving. Your money is working harder for you sooner and getting you closer to paying the entire loan off.
Bi-Weekly Payment Programs
When you make monthly payments, you make 12 payments per year. When you break payments down into bi-weekly payments, you end up making an extra payment since there are 13 weeks per quarter. That’s four extra payments per year.
Most loan serving companies require you to enroll in bi-weekly payments to stay on a systematic arrangement and ensure that payments are properly recorded as principal and interest.
This technique is similar to making an extra principal payment per quarter but is a more formal arrangement with your lender or the servicing agent. Confirm that your lender does appropriately put the extra payments to the principal and doesn’t apply it to the escrow balance or next month’s payment. The company may not be entirely forthright in explaining this to you since they will be losing profit via less interest earned on the loan over the life of the loan.
Lending companies make money based on interest and if you are paying it off faster, they will not always help you. Do your homework and check your annual escrow statement to ensure your payments are recorded, as you desired.
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