Your mortgage is probably your largest investment. Saving money on your mortgage allows you to increase your income by the percentage rate of your loan. If you are paying 2, 3, or even 7% on a loan, the cost savings effectively pays you back at that rate. This is a guaranteed return and incredibly safe investment. It simply makes sense to save money on your mortgage as long as it doesn't significantly hurt your cash position or your ability to pay off shorter term debt.
I assume you maintain a budget. If you don't, you should! Your mortgage probably is the largest cash payment from your budget every month. Imagine how fast you could ramp up your retirement savings, build a college fund, or save up for a big vacation if you didn't have that payment! In addition to the increased cash flow, having your house paid off also comes with a sense of security – that you own your home and not the bank.
Paying off your mortgage early also allows you to potentially reduce your emergency fund simply because your home could be a source of credit. It also means that your cash burn every month would be that much lower so in the event of a catastrophe, your monetary stress would be significantly reduced.
As I said about a year ago, follow the old Benjamin Franklin saying, “A penny saved is a penny earned.” All of the money that you save on your mortgage is like a guaranteed investment.
Here are some ways you can pay off your mortgage early.
1. Round up your payment of your mortgage
The easiest way to pay off your mortgage faster than normal is to simply include additional money on every payment you send to the bank. Round up your payment so that it ends in 2 zeros (e.g. $1,600 rather than $1543.86). The additional money will go straight toward the principal of your loan rather than to paying the bank interest. Over time this will slowly pay down your mortgage faster than your original financing term.
It is even better if you add a couple hundred dollars to your payment. Adding 2 or 3 hundred dollars will significantly accelerate your paying off the mortgage.
Check with your lender to see how they treat additional payments. Most banks automatically apply additional payments to any outstanding fees. How they handle extra payments after that can vary so be sure to note on your extra payment that it should be applied to your principal. If you aren't able to make slightly larger regular payments, it may be time to consider refinancing your home with a more friendly bank.
2. Bi-weekly mortgage payments
A second way to send in additional payments is to coincide your mortgage payment with your paycheck. If you are paid bi-weekly, you simply send in half of a mortgage payment on each pay day.
This doesn’t seem like it would save you any money, but you’ll end up paying an extra month’s worth of payment every year. While there are 12 months in the year, there are 52 weeks in the year. If every month was exactly 4 weeks, there would be 13 months in the year. By paying the bank every 2 weeks, you will essentially make 13 mortgage payments rather than only 12.
3. Refinance your mortgage for a shorter term
Another way to pay your mortgage down faster is to refinance to a shorter mortgage term. If you’re three years into a 30-year mortgage and refinance to a 15-year mortgage, you’ll save money over the life of the loan. Granted your payments will be higher every month, but the shorter term combined with the higher principal payments will save you a lot of money in comparison to your previous mortgage.
4. Refinance your mortgage to a lower rate
You need to aggressively look for the lowest rate that you can pay on your mortgage. Aggressively shop for a better rate. There will likely be closing costs that you will incur. As long as you recoup the closing costs in a couple years, then it is worth refinancing.
5. Mortgage recast
It may be worthwhile to take some of your investments to recast your mortgage. This is also a consideration if you have suddenly come into a sum of money (selling a car that you don't need to replace, inheritance, or an unusually large bonus payment).
A mortgage recast is used to pay off a big chunk of your loan at once. When you recast your mortgage your bank actually reamortizes your loan based on the remaining term left on your loan and the new loan balance. Your interest rate remains the same but because you’re paying interest on a lower balance, the amount of overall interest you pay goes down.
There are some limitations on this strategy. Not all banks are willing to recast a mortgage so if yours doesn’t allow it then it won’t work for you. Most banks will have a minimum amount that you can recast and typically they’ll charge a several hundred-dollar recast fee. Some banks have limits on the number of times they’ll recast your mortgage.
The goal in all 5 of these strategies is to give you more money to invest in the long term. Effective budget management is essential for these strategies to work. Budget management is the key for any effective investment strategy.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net