Deciding to pay off your mortgage early has been a controversial topic for some time. There are definitely risks — but for those who have managed to conquer some of their big financial goals and erase debt, paying off your mortgage ahead of time might make sense.
There are a few ways you can go about paying. Let’s take a look at some of these strategies:
Refinancing to a 15-year mortgage.
If you have a standard 30-year term for paying off your mortgage, bumping it down to a 15-year mortgage will cut your time in half. You’ll typically pay a lower interest rate, but make larger payments each month. To get a gauge on how much this refinancing process can save you, use this tool for current estimated mortgage rates. While this is usually a safe option, it does have downsides. Having a higher monthly payment will give you less flexibility in your budget. You’ll want to make sure you have a steady, long-term income plan to move forward with this strategy.
Refinance with the same payments.
Refinancing is a good way to decrease monthly payments. However if you do decide to refinance, you could end up doubling up by reducing your interest rate and continuing to make the same monthly payment. This is essentially the same result as making extra payments each month on your current mortgage, but provides a lower amount required. This allows for more budget flexibility and the opportunity to pay more towards your mortgage principal without increasing your payment.
Utilize pay raises and bonuses.
While this isn’t applicable to everyone, those who receive bonuses or raises for job performance could use that money to put towards a mortgage. Ideally, you’ll want to put the same percentage of your income towards your mortgage, even if/when pay goes up. Again, this option is better suited for those who plan to be at a company long-term, and know they’ll be receiving bonuses and pay raises often.
Pay lump sums with cash windfalls.
If you have the money, paying in large lump sums every once in a while might do you good. You can do this with a cash windfall. Cash windfalls are considered large and often unexpected sums of income, like an inheritance, lawsuit settlement, salary bonus etc. You can apply these payments directly towards the principal of your loan.
Make bi-weekly payments.
If you choose to make biweekly payments on your mortgage, this will amount to an extra mortgage payment every year. This acts as a kind of workaround to refinancing to a 15 year plan. You can manually log in to make payments, or use a free bill pay service to set up automatic payments.
Set an ideal end date for paying off your mortgage.
Like all big projects, setting a timeline and deadlines will hold you accountable to get things done. Setting a target payoff date gives you an idea of exactly how much extra to pay each month.