Once you finally get settled into your new home and have started making monthly payments, you may stop and wonder how much longer you have to do this before you are mortgage free.
But there are ways to pay it off faster without paying hefty fees. Do not let the thought of having to pay for a mortgage for the next 25 years scare you.
Understand Bi-Weekly Vs. Monthly Payments
Is there really much of a difference?
If you have an amortization period of 25 years and are paying bi-weekly for 26 weeks of the year, it is the same as making 13 payments in a year instead of 12. It may just seem like you are making one extra payment a year, but in the long run, those extra payments could end up taking off four years of your amortization period. That is also four years of saved interest costs.
Pay Off Your Mortgage Faster With Accelerated Mortgage Payments
With an accelerated mortgage payment, you are making one extra payment each year. Your mortgage contract will outline how much extra you can pay before you will be charged a penalty fee. Even though you are just paying one extra payment, you will end up paying your mortgage off sooner and save thousands in interest charges.
Choosing Your Payment Terms
Every person has a different financial situation. Depending on how stable your income is, and how much you can budget for, you may be able to have bi-weekly payments set instead of monthly.
Monthly: Your payment will come out on the same day every month, meaning you make 12 payments each year.
Weekly: Your payment will come out on the same day each week, meaning you make 52 payments each year.
Bi-weekly: You will make a payment on the same day every second week, meaning you make 26 payments each year.
Accelerated Weekly: You are still making 52 payments a year, but the price will be higher than normal. The monthly mortgage rate will be divided by four, and you will pay that total every week.
Accelerated Bi-weekly: You will still make 26 payments a year, but the price will be higher than normal. The monthly mortgage rate will be divided by two, and you will pay that total every two weeks.
Putting Down A Lump-Sum & Extra Payments
Depending on the type of mortgage option you decided on, you may be able to make extra payments up to a certain amount without having to pay a penalty fee.
If you receive a bonus, or get a raise, or a tax refund, put that extra money towards your mortgage principal. Even something small like $25 every month can make a huge difference in the long run. You can also make a large lump-sum payment each month, on top of your regular payment. Each contract will outline how much extra money you can put down monthly, and yearly, towards your mortgage. If you have an open mortgage, it will be a lot easier to make extra payments than if you have a fixed rate mortgage. With an open mortgage, your interest rate may be a bit higher, but there will be no penalty fees for paying extra.
Re-finance To A Different Mortgage Option
Once it comes time to re-finance your mortgage, you may either want to keep your same plan with a lower interest rate, which may shorten the 25-year period by a few years, or maybe just go with a shorter amortization period. Your monthly payments will increase and you may have to adapt to new budgeting strategies, but if you are positive you can do it, then do it! Shortening your amortization period may make the most sense if you are looking to sell your home and it could end up saving you money. Though most mortgages are transferable between houses, if you are downsizing, it may not make sense to keep your current plan.
Make A Higher Down Payment
Coming up with a higher down payment can definitely be tricky, especially for young adults first getting into the market. But if you are able to save more money for your down payment, it will mean a shorter amortization period, lower monthly payments, and you build equity on your home right away.
Having a higher down payment, though it may take longer to save for, helps you save money in the long run, as you will not be paying as much in interest costs. And since it will make your monthly mortgage payments smaller, you can apply for additional loans much easier.
Save Money On Other Things
Creating a budget plan every month can help you save money on other things that you could put towards your mortgage instead. Instead of driving to work every day and spending money on gas, is it possible to take transit, ride your bike, carpool, or walk? Bring a lunch to work every day too instead of always buying something. Decrease the amount you order in too. Dedicate every Friday night, or every other Friday night, to order in or have a date night. Pay attention to your electricity and water usage too. Remember to turn lights off when you are leaving to room and cut your shower time in half.
There are many different mortgage options to choose from that fit your needs, especially if you are planning to put extra money down every month on top of your regular payments. Each mortgage will have different contract rules, so make sure you understand them.
Think about ways you can save money too. Even if you can only dedicate $20-$30 extra every month, that could still help you in the long run. Saving on things like monthly gas costs or buying food can make a huge difference too.
Create, and write down, a set budgeting plan and stick it on the fridge. Referring back to it and seeing things in writing will help you see what is working or not and how quickly you really are paying off that mortgage.
Each mortgage contract will state different repayment rules. If you go over the amount specified, you may have to pay a penalty fee.
Do not just budget for your mortgage payments though. Remember that there will be other bills:
- Property Taxes
- Home Insurance
- Unexpected emergency costs
Each extra payment you make is shortening your amortization period, which may sound wonderful. Your bi-weekly payments may be easier to budget for if your payments come out automatically when you receive a paycheck every two weeks, but if something unexpected arises, it could easily knock you off track. It may be easier for you to just make lump-sum payments whenever you feel is necessary but remember there are also penalty fees for paying more than is stated in your contract. There is also a fee for paying your mortgage off early than the term says.