Smart Ways to Eliminate Your Mortgage
According to a Zillow study, about 37% of American homeowners own their homes free and clear.
For some homeowners, particularly ones who anticipate moving up (or downsizing) or relocating for a job, paying off the their mortgage early may not provide much benefit.
And, there are some schools of thought that suggest that the relatively low interest rates on current mortgages provide homeowners an opportunity to invest excess cash into other investments, instead of paying off their mortgage. This is definitely something you should discuss with your financial adviser.
However, the allure of living “debt free” has gained momentum in recent years, and for many, the thought of owning their home and eliminating the mortgage payment is a strong incentive. Going into retirement without a mortgage is particularly compelling, and frees up cash for travel and other bucket-list adventures.
If you want to work towards becoming part of the 37%, or if you just want to increase your equity faster, there some solid steps you can take to make that happen.
Make Bi-Weekly Payments
If you rework your budget to pay 1/2 of your mortgage payment every two weeks, instead of one lump payment at the first of each month, you can shave nearly 5 years off your mortgage, and save yourself tens of thousands of dollars in interest.
Let’s say your mortgage payment on your Fountain Hills home is $3,000/mo. Annualized, this is $36,000/year. However, if you pay $1,500 every two weeks, you actually make 26 payments, or the equivalent of 13 payments. You are paying $39,000 for the year.
Now, take a typical $500,000 Fountain Hills home, at an interest rate of 3.5%. Your monthly payment of $2,245 will cost you over $308K in interest over the life of a 30 year mortage. However, if you pay $1,122 every two weeks, your total interest cost over the life of the loan is only $262K, and you’ll have the mortgage paid off in 26 years. That’s if you don’t do anything else to pay down your mortgage faster.
I don’t know about you, but saving $46K in interest sounds really good!
Pay Extra Principal Every Month
For the first few years of your mortgage, you payment is mostly interest. It may seem like slow going to start eating away at the principal. However, if you make an extra “principal-only” payment, in addition to your regular payment, you can start whittling away at your principal faster. The advantage of this is your interest costs go down as the principal decreases, thereby saving you money in interest and accelerating principal reduction.
Let’s use our example above, with a $500,000 mortgage at 3.5% interest. Adding a mere $100 to each monthly payment, you will save over $25K in interest, and you’ll shave 2 full years off the mortgage term.
How can you make this work on a tight budget? Make small sacrifices. How much do you spend on gourmet coffee or eating out? If you redirected those expenditures toward monthly principal-only payments, you could make great strides to reach your goal.
However, you do want to check with your mortgage company before attempting this strategy. Depending on the terms of your mortgage, there may be pre-payment penalties, or there may be restrictions on when you can make principal-only payments.
Go for the Shorter Term
Let’s say your circumstances have changed since you originally took out your mortgage. A big promotion at work, a spouse re-entering the workforce, or other life changes may mean you can afford a bigger mortgage payment now. If so, you can refinance out of your 30-year mortgage and into a 15-year mortgage or even a 10-year mortgage.
You can save a substantial amount of interest costs by employing this strategy. Using our example of a $500,000 Fountain Hills home, a 30-year mortgage at 3.5% interest will have a monthly payment of $2,245. A 15-year mortgage at 3.1% interest will carry a monthly payment of $3,477. However, you will save $183K in interest over the life of the loan. That’s a lot of tropical cruises are trips to Europe!
Use Care When Refinancing
Many people feel compelled to chase interest rates if rates dip significantly lower than the rate on their current mortgage. This may make sense if you make a one-time switch into a shorter-term mortgage at the same time. However, if you find yourself repeatedly refinancing to get a lower rate, you may actually be costing yourself MORE in the long-run. This is due to the fees involved with refinancing. If you also take cash out, then you are reversing any gains you may have made. If you are thinking about refinancing, definitely make sure you examine the bottom line closely. You find out you are better off sticking with your current mortgage and employing one of the other strategies outlined above.
Whether you are buying or selling in Fountain Hills, Susan Pellegrini and Karen DeGeorge are ready to put their care and expertise to work for you. Buying or selling, our first-class service comes with a wealth of experience and eye for detail, ready to focus on you. Visit our website to learn more and contact us or give us a call at (480)- 315-1575, we’re here for you.