As of last year, my wife and I are first-time homeowners. It was trial by fire to say the least. Once we found the home we wanted and could afford, it was loan time. It took us a while to navigate all of the loan lingo until we could fully understand what type of loan we wanted and how best to pay it off. In the end, it feels great to be a home owner, and the things we learned will stick with us for a lifetime. With that in mind, I wanted to pass along four tips on the best way to pay off your mortgage as quickly as possible.
Sign-up for Bi-Weekly Payments
This is perhaps the most painless way to pay off your mortgage quicker. The bi-weekly payment plan allows you to make a half-payment every two weeks instead of a full payment once each month. So with 52 weeks in a year, at the end of the year you will have made 26 half payments or the equivalent of 13 monthly payments. If you have a 30-year mortgage, this plan is a must for you. Depending on the interest rate and size of your loan, it can easily knock off several years on your loan.
Increase Number of Payments
If your lender either does not offer a bi-weekly payment plan, or like my lender they charge a $250 fee to join, you can always just make an extra payment every year. Make sure that the payment goes towards principal only. You can make the extra payment monthly, once per quarter, or annually. I opted for paying a little extra every month as it increases my equity the quickest. A trick I used was dividing my monthly payment by twelve and adding that amount to my monthly payment. So in essence, I was making exactly one extra payment per year. This is a great way to do it if your lender down not offer a free bi-weekly payment plan.
Re-fi To a Better Rate
Interest rates are incredibly low right now. Take advantage if you can. A 30-year fixed loan is hovering around 4.25 percent right now. If you own at least 20 percent of your home, you would be crazy to not re-finance to a better rate. The prospective lender will require an appraisal of your home and you need to have at least 20 percent equity for the re-fi to fly. Check comparable sales in your area if you are not sure what your home is worth before you pay for an appraisal. Also, if you are strapped for cash, ask about a no-cost re-fi where your rate will be a little higher but you won’t be out any money in closing costs.
Shorten Loan Time frame
If you currently are in a 30-year loan, consider refinancing to the 15-year variety. You will be blown away with how much less in interest you’ll pay. But obviously you have to be able to afford the higher payments. Currently, 15-year fixed loans are right around 3.45 percent. If you know you can afford the payments but are still on the fence, think of it this way, where else can you earn 3.45 percent on your money right now?