This is the key to paying off your mortgage early!
If you are a first time home buyer and wondering what type of mortgage you should choose, ideally, you want a 15 year fixed rate mortgage over a 30 year one. The payments are higher, so you need to make sure you can handle the monthly costs. Your target should be about 25% of your monthly earnings. You can offset the monthly mortgage payment by putting more money down, but that all depends on what you have saved. The reason for applying for a 15-year mortgage rather than a 30-year mortgage is that you are out of debt in half the time and (more importantly) you pay less money in interest.
A 15-year mortgage is not always the best idea because you have to be practical in assessing what you can afford. If you bite off more than you can chew, you will wind up suffering from repercussions that far outway the money saved on interest payments. However, be cautious about choosing a 30-year mortgage too hastily. Lots of people opt for the 30-year plan with the idea that they will pay it off in 15. However, it’s very uncommon that they actually accomplish this. With that said, If you find yourself in a 30-year mortgage and you want to pay it down in half the time, there are some measures you can take to reach that end goal of paying off your mortgage and lowering the amount of interest you pay. Here’s a quick guide on how to pay off a 30-year mortgage in 15 years.
Make Sure You Can Pay More
Before you begin paying off your mortgage sooner than the agreed-upon term, you need to look at what your bank will allow you to do. Some banks penalize you for paying extra and you should be aware of what those additional fees are. The only way to get a loan paid off in half the time is to pay twice as much, so if there is anything in the contract that says you can’t do that you will be unable to proceed under your current agreement.
If you have a particularly bad loan agreement or are paying too much interest, you can always go the route of refinancing. That could get you out of a 30-year mortgage and into a 15. Then you would have nothing more to do other than continue to make payments under the new agreement. The downside to refinancing is that that includes fees as well. So, in addition to determining what you can afford to pay monthly, you also have to consider the value of saving on interest compared to the upfront cost of the financing service fee.
Make Extra Payments
Provided you have no penalties for paying off your loan early and your bank allows you to make extra payments, there are some things you can do with your money to ensure that you pay your loan off earlier and thus avoid losing more money to interest than you have to. Depending on your comfort level, here are some ways you can speed up your payoff time.
You can make biweekly payments instead of monthly and really speed up the process of paying off your home loan. This is a two-pronged approach. First of all, the two monthly payments affect how interest is calculated on the loan. In a broader sense, paying biweekly adds up to one extra full payment in a year. That’s if you just stick to making half of your regular monthly payment every two-week cycle. This is also a very convenient way to pay your bills if you are on a two-week pay cycle since it is more or less automatic and it requires less effort to retain that money for the monthly due date.
The quarterly approach is another great way to pay your loan off faster as long as you can afford it. This is a more aggressive plan but you can pay off your mortgage up to 11 years early just using this plan alone. All you have to do is make one full extra payment every three months.
Even if you just make an additional payment once a year you will save yourself some money in the long run. You can do this with a year-end bonus and apply it to other methods of paying off your house faster.
Of course, the best way to pay off your loan in half the time is to pay twice the amount. Before you take this approach, consider whether paying off your loan in 15 years is the most important thing or the best financial decision. If you have the money to put toward extra mortgage payments each month you may have other financial opportunities you are overlooking. Even 15 years is a big commitment, so investing in something more liquid may be a better decision for you.
Save and Pay
It’s easy to say, “pay more money and get out of debt faster.” If only it were that easy to do! You aren’t going to magically come up with extra mortgage payments or find them in your couch cushion during spring cleaning. But, there are always ways to clamp down on your budget and move your expenses around.
Save On Purchases
Saving money makes the most sense, next to earning more money, which you should consider as a real option if you really want to commit to a larger monthly payment for the next 15 years. Don’t ignore the real possibility that you might need to get a new job, or at least start a side gig to bring in some extra money. Regardless of pay increase, you should always be looking at the way you manage money. That means frequently adjusting how you spend it. Look at what you can comfortably afford to pay out every month. That’s your income, minus how much you want to save.
Using that number, look around at your monthly expenses and see what you can cut. Some cuts are instant like canceling a subscription, some will require practice such as keeping your grocery bill under a certain amount. Whatever you cut, can then be applied to your mortgage, or some form of savings plan.
Invest in High-Interest Funds
Paying off your 30-year mortgage in 15 years is a worthwhile pursuit, but you should also consider how that money might be put to better use. Consider a mutual fund that accrues higher interest and is far more liquid than a mortgage. Over time the interest earned could develop into one big payment down the road. You will have to calculate the earnings against the interest paid on your home loan. It all depends on what you continue to invest, but it’s arguably better than tying that money up and you have more freedom to determine what you invest and when you invest.
Other forms of investment to consider as alternatives to a quicker payoff on your home mortgage are retirement funds. You could contribute after-tax dollars to a Roth IRA and let your tax-free investment grow, or you could take the deduction now with a regular IRA and split the earnings with the government when you cash it out. Contribute to a 401(k) if you prefer, or a 529 college savings plan. Anyone of these choices is a solid investment that may be better options for you if you can’t comfortably commit to a 15-year payoff plan for your mortgage.
Tell us how your mortgage tips in the comments! And, if you found this post helpful, we’d be so thankful if you would share it!