(Newswire.net — September 23, 2020) — Mortgage balances are about 71% of total household debt. That debt can stay with you for 30 years.
Sure, after 30 years the home is yours but, who wants to wait that long? There is so much you can do once your mortgage is paid off. You can save for retirement, or be a major step closer to financial freedom.
If you want to get your mortgage paid off faster than 30 years, you need to develop a plan of action. Keep reading to learn how you can get your mortgage paid off early.
Does It Make Sense to Pay Off Your Mortgage Early?
The first decision you need to make is whether or not you should pay off your mortgage sooner. It depends on what other forms of debt you have and your overall financial picture.
If you have high-interest debts such as credit cards and personal loans, you should pay those off first, and then use the funds you usually pay towards debts for an extra mortgage payment. This method puts more money in your pocket and less money in the bank’s coffers.
If your credit card debt is manageable, you should work towards paying off your mortgage. The more debt that you can eliminate now, the easier it will be to build wealth and move forward financially.
Mortgage Payments and Taxes
Another consideration is the tax deduction you get for paying mortgage interest. It’s one of the big advantages that owning a home has compared to renting.
With the signing of the Tax Cuts and Jobs Act late in 2017, many homeowners have had to adjust their taxes. That’s because the standard tax deduction was increased.
You may find that the amount of interest paid was less than what you’d get on the standard deduction. In that case, it doesn’t matter if you pay off your mortgage early because you won’t see a tax benefit.
On the other hand, if your interest paid is more than the standard deduction, then you’d want to take caution and look more closely at paying off your mortgage early.
Set a Goal to Pay Off Mortgage
When you decide that paying off the mortgage is the right move for you and your financial health, you’ll need to set a goal to pay it off. That will help motivate you and get your debt paid off.
You’ll have plenty of instances where you may want to do something else with your extra income. The goal will keep you focused and on track.
You also want to keep your goal realistic. Paying off a $300,000 mortgage in 10 years would mean that you’d pay almost double your mortgage payment every month. That would probably stretch your budget, not to mention setting yourself up for failure.
Check Your Mortgage for Prepayment Penalties
Mortgage companies draw up mortgage terms that are favorable to them. They know that mortgages are profitable because they collect so much in interest over time. A $200,000 30-year mortgage actually costs you more than $343,000 at a 4% interest rate.
Banks depend on that interest income, so if you pay down your mortgage fast, they’ll lose that interest income. Lenders often include a prepayment penalty to discourage you from paying off your mortgage fast.
You’ll need to check if your mortgage has a prepayment penalty and what that amount is.
Add $1 To Each Monthly Payment
This is an interesting game, but it can save you boatloads of money in the long run. Here’s how it works: keep adding $1 to your payments each month.
Let’s say that your first mortgage payment is $1,000. In the second month, you’ll pay $1001. In the third month, you’ll pay $1002 and so on.
It’s a simple way to bring down your mortgage payments and save money in interest payments without breaking the bank.
Refinance If Interest Rates are Favorable
Interest rates are still at all-time lows. If you had your mortgage for a few years, you may benefit from refinancing your mortgage at a lower interest rate.
You could save money on interest over the life of the loan and lower your monthly payment. In that case, pay the same amount every month that you have been. That will help you pay off your mortgage much faster.
Make a Lump Sum Payment
Every now and again, good luck finds us. If you find yourself in a situation where you receive a lot of money at once, apply that to the mortgage.
Of course, you want to use the after-tax amount of your lucky windfall. You could wind up with big headaches come tax time.
Make an Additional Mortgage Payment a Year
The IRS processed about 122 million tax refunds last year. Most of the time, that money is spent before it even hits the bank account.
You can take advantage of your tax refund by applying it to your mortgage. Just one additional mortgage payment can help you pay your mortgage early.
The other way to go about it is to take the amount of your mortgage payment and divide it by 12. That’s the amount you want to add to your mortgage payment each month. That amount equates to a full mortgage payment and by the end of the year, you’ll have made 13 mortgage payments.
How to Pay Your Mortgage Faster
Mortgage payments can be a big burden on households, especially as the economy changes, and jobs aren’t very secure. Your best protection may be to pay your mortgage off early.
It will lower your household debt and put you in a position to save and invest your money. It is possible to pay your mortgage early, though you do need to see if there are prepayment penalties. Be sure to have goals and the discipline to see them through.
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