As a homeowner, it can be difficult to choose between paying off your mortgage early or putting money into your retirement savings account first. But for some people who already spent years settling their monthly payments, a mortgage might feel like a heavy weight that they want to get rid of as soon as they can. If you're one of these people, this article is for you as we'll be covering tips on paying off your mortgage early.
Making an extra mortgage payment can help accelerate your payoff process. But before doing so, make sure that there is no prepayment penalty.
Prepayment penalties are fees charged by mortgage lenders when you pay off your mortgage early. Not all mortgages have a prepayment penalty. But if yours does, you would have agreed to it upon closing.
There are two methods you can use to make extra payments on your mortgage; either you make biweekly payments or put extra monthly payments against your principal.
The first method is to pay half a mortgage payment every two weeks. With this approach, you'll make 26 half-payments which equals 13 full monthly payments each year instead of just 12. This method hardly makes a difference in the monthly budget, which makes it easier for some homeowners to follow. And if done right, biweekly mortgage payments can help you save more in mortgage interest over the life of the loan.
But before proceeding with making extra payments, ask your mortgage lender first whether they accept biweekly payments. If not, you can opt to just set aside your biweekly payment amount and combine them into a single payment each month. It might not be as convenient as a regular biweekly payment method, but the benefit of having an extra annual payment is still there.
The other method is to make extra mortgage payments against the principal balance each month. Just like biweekly payments, making additional payments on your principal can help reduce your interest payments.
Adding more to your monthly mortgage payment is often a better method than refinancing if you're not able to get lower interest rates. Making extra payments might also make more sense if you're already well into a 30-year mortgage.
If you plan to choose this method, check with your lender to confirm that your extra payments are applied on reducing your principal balance and not your interest rates. You'd also want to ensure that your lender fully understands that the extra payment is not for next month's mortgage payment.
Mortgage refinance will require more thought compared to making extra payments. This is because refinancing has associated expenses. And if you're not careful, these costs might outweigh the savings that you hope to get.
If you plan to refinance in order to pay off your mortgage early, do so only if you can get a lower interest rate or a shorter loan term.
A shortened loan term, which puts you on the path of an early mortgage payoff, can also help lower your interest payments. However, refinancing to a shorter-term loan will mean higher monthly payments which might stretch your budget too thin if you're not ready.
The next method is called mortgage recasting. This method for paying off your mortgage early is just like the previous approach where you make extra payments. But instead of doing it every month or per year, you make one large lump sum payment toward your mortgage principal, typically more than $10,000. Once your lender receives the lump sum payment, they will then adjust your amortization to reflect the new balance.
Although you'll still have the same loan term and interest rate, recasting will lead to lower monthly payments which can save you money. If you use those savings to make larger monthly payments, you will be able to pay off your mortgage early.
However, recasting your mortgage may require a fee of a few hundred dollars. Moreover, recasting doesn't apply to both FHA and VA loans.
Rounding up your mortgage payments is another method to help you reduce your mortgage term faster. How this works is instead of paying just the exact mortgage payment amount, you round it up to the next $100. For example, instead of paying just $769, you round it up and pay $800 instead. Or instead of just $850, you pay $900.
Lastly, you can opt to send any financial windfall immediately to your lender. This could be from a tax refund, bonus from work, inheritance, funds from a sale, or any unexpected influx of cash.
If you're working with a mortgage servicer, make sure to specify that this lump sum payment goes toward your principal balance only. If you're not sure how such lump sum payments work, you can always check with your servicer.
Whether you're a first-time homebuyer or planning to refinance, the mortgage process can be overwhelming. But working with a mortgage broker from Ebenezer Mortgage Solutions will not only give you a stress-free process, but it can also help you get an approved mortgage faster.
Let Ebenezer Mortgage Solutions help you get the mortgage program that suits your needs and situation best. Call us today at (813) 284 - 4027 to start.