If you're looking for the financial security owning your home can provide, it doesn't have to be a distant fantasy. In fact, it may be closer than you think. Here are nine ways you can pay off your mortgage faster.
1. Consider a larger down payment
Your down payment plays a big role in your mortgage payment calculations. The more you put down, the less you need to borrow. But your down payment affects more than that. Most conventional loans require one of two things — 20% down or private mortgage insurance (PMI). If you put less than 20% down, your lender requires PMI as a form of insurance in case you default on your loan.
If you increase the size of your down payment, you could avoid the extra cost of PMI and reduce your loan amount or term. The money you would be spending on PMI could be used to make extra payments on your loan, helping pay your mortgage off sooner.
2. Shop around before you buy
Mortgage rates and terms vary by lender. Compare your options before you sign on the dotted line. While one lender may offer a much shorter loan, the monthly payments could be very high. Paying off your mortgage quickly may be a priority, but make sure you can afford it before you select the shortest term.
In addition to mortgage rates, you also need to consider closing costs. In some cases, you may be able to get the seller to pay your costs. Talk to your lender about closing costs, and don't be afraid to move on if you don't feel like you're getting the best deal.
3. Don’t overextend yourself
We all have a picture of what our dream home looks like. Maybe it includes a gourmet kitchen or, perhaps, a sprawling backyard. Often, we can become so consumed with our wish list that we push our budget further than we should.
If you want to pay off your mortgage earlier and don't want to be overburdened with debt, take a close look at your finances. Use a mortgage affordability calculator to find out how much you can comfortably afford and stay close to that amount.
If you keep your payments within your budget, you're more likely to have additional money at the end of the month. If you want to pay down your mortgage faster, using this extra money to put towards your balance is a good place to start.
4. Choose a shorter-term loan
When you purchase a home, you have several options. One of the biggest decisions you'll make is what type of loan term you choose. Many homebuyers choose a 30-year loan. If you're looking to pay off your mortgage faster, you may want to look at a 15-year loan. Ask your lender if they offer other terms such as a 20 or 25 year which may not have as much of a higher payment impact.
15-year loans result in higher payments because you're paying off the loan in half the time. But these loans often offer more competitive rates. Because you're paying a lower interest rate and paying that rate over a shorter period, you could end up paying less interest and spending less on your home overall.
Think a 15-year loan isn’t an option? What would happen if you made a larger down payment and chose a more affordable home? An online mortgage calculator can help you review your options and choose the right loan term.
5. Make bi-weekly payments
The average homeowner makes their mortgage payment once a month. That's 12 payments per year. With bi-weekly payments, you pay half your monthly payment every two weeks. This way you end up paying 26 payments, or the equivalent of 13 months. In other words, one extra payment every year.
The extra annual payment can help you reduce the interest you pay, earn equity faster and, ultimately, allow you to repay your mortgage faster. Check with your lender to see if they offer a bi-weekly payment option. If not, see if you can still make payments every two weeks and make sure any extra payments are applied correctly.
6. Use an unexpected windfall to pay down your loan
Did you get a surprise bonus from work or receive a large inheritance? While the instinct may be to spend this money or put it in the bank, another option is to pay down your mortgage balance.
Before you write a check and put it in the mail or press send on your online payment, talk to your bank first. Different banks have different rules, and, in some cases, your lender may charge a fee if you pay off your loan early. You’ll also want to confirm the full amount goes to the loan principal. A quick phone call can help you determine whether you need to do anything to make sure your money goes to the right place.
7. Ask your lender about a mortgage recast
Putting extra funds towards your mortgage is great. Unfortunately, it doesn't matter how much extra you pay, your monthly payments still stay the same. That is, unless, you request a mortgage recast.
With a mortgage recast, the bank looks at how much you owe on your loan and recalculates a new monthly payment spread out over your remaining loan term. Though this may not seem like it helps you pay off your mortgage faster, when you have extra money available at the end of the month, you can put that money right back into the loan.
8. Make paying off your mortgage early a priority
How much extra money could you find if you took a hard look at your budget? What if you made a few strategic cuts? Chances are, you can do without a few unnecessary costs or find ways to reduce monthly bills. When you shift your priorities, you might be surprised by how much money you’re spending on things you don't need.
If there's nowhere to cut, or you just don't want to reduce your costs, consider how you can increase your monthly income. This could be achieved by working a few extra hours, asking your boss for a raise or bringing in some cash through a second job.
9. Refinance your home loan
Refinancing your mortgage can be a great way to reduce the length of your loan and pay off your home faster. If you’ve never refinanced a property, it's important to understand the options available:
- Interest rate reduction: Interest rates fluctuate throughout the life of your loan. As a homeowner, it's always a good idea to watch current mortgage rates. Little changes might not make a big impact to your mortgage payment, but a rate drop of 1-2% could. If you're not sure whether you should refinance, talk to your lender.
- Shorter term loan: Maybe you couldn't qualify for a 15-year loan when you first purchased your home, but now you can. Refinancing involves reevaluating your financial health. With a higher income, more savings and a better credit score, you could qualify for a much shorter term.
Paying off your mortgage early is a great way to free up extra money and gain financial freedom, but keep in mind that there are usually costs associated with refinancing your loan. There are many options available and your lender can help you determine the right ones for you based on your financial circumstances. If you're thinking about buying a home, refinancing your loan or are looking for ways to pay off your loan early, talk to a Home Lending Advisor to discuss your options.