(Courtesy of DaveRamsey.com)
More than 20 million Americans own their homes outright. Some bought their homes with cash while others whittled away at their mortgages year after year until they were gone.
That leaves about two-thirds of the nation’s homeowners with the goal of one day making that last mortgage payment. Since we’re all about getting out of debt as quickly as possible, here are a few suggestions to get your home loan paid off quickly.
An Extra Habit
Each time you pay extra on your mortgage, more of each payment after that is applied to your principal balance. Here are some options for paying extra and examples of how extra payments will affect the average $220,000, 30-year mortgage with a 4% interest rate:
- Make an extra house payment each quarter, and you’ll save $65,000 in interest and pay off your loan 11 years early.
- Divide your payment by 12 and add that amount to each monthly payment, or pay half of your payment every two weeks, also known as bi-weekly payments. You’ll make one extra payment each year, saving you $24,000 and shaving four years off your mortgage.
- Round up your payments so you’re paying at least a few extra dollars a month.
- Increase your payment when you get a raise or bonus.
Always check with your mortgage company before you make additional principal payments. Some companies will only accept extra payments at specific times or they may charge prepayment penalties. And always make sure the additional money is applied to the principal and not next month’s payment.
Refinance—or Pretend You Did
The only type of debt Dave won’t yell at you about is a fixed rate 15-year mortgage with a payment that’s no more than 25% of your take-home pay. You’ll pay much more in interest on a 30-year mortgage and, besides, who wants to be in debt for 30 years?
You can refinance a longer term mortgage into a 15-year loan. Or, if you already have a low interest rate, save on the closing costs of a refinance and simply pay on your 30-year mortgage like it’s a 15-year mortgage. The same goes for a 15-year mortgage. If you can swing it, why not increase your payments to pay it off in 10 years?
Using the same stats above for the average mortgage with a 15-year term, you’d need to bump up your monthly payment to about $2,200 to pay off your loan in 10 years. You’ll save $25,000 in interest, but best of all, you’ll be out of debt five years sooner and have $2,200 a month to invest for retirement, save for college, or give away!
This could be a drastic step, but if you’re set on getting rid of your mortgage, consider selling your larger home and using the profit to buy a smaller, less expensive home.
With the profits from your home sale, you may be able to pay all cash for your new home, but even if you have to get a small mortgage, you’ve succeeded in reducing your debt. Now your goal is to get rid of it as quickly as possible. The smaller the balance, the quicker you can make it happen.