Early mortgage payoff is not the right choice for everyone. One of the biggest advantages to having a mortgage is that it allows you to deduct your mortgage interest on your income taxes. Once you payoff your mortgage you will lose these tax savings each year.
Throughout recent years several countries have experienced economic problems. Because of this, cash has become king more than ever. One of the biggest downsides to paying off your mortgage early is that you will have a large amount of money tied up in a illiquid asset.
If you have a large amount of cash in reserve and have your retirement accounts well funded, then beginning to pay off your mortgage quicker is a great option. Here are a few different steps that you can follow to become mortgage free.
1. Increase Monthly Mortgage Payment Amounts – You can select to pay an additional sum of money each month on top of your normal payment. You need to make sure your mortgage company understands that this is to go towards principal pay down otherwise they could apply it to your next months payments. My payment stubs have a box that is for additional principal payments.
2. Increase the Number of Payments – One of the easiest ways to reduce the timeframe it takes to payoff your mortgage is to increase the number of payments that you make. By changing to bi-weekly from monthly payments, you will speed up principal reduction and, in turn, pay less interest.
When you switch to bi-weekly payments you can pay off your mortgage as many as six to eight years early. Before you make the switch, make sure you talk to your mortgage lender because some companies can charge up to $400 to set up bi-weekly payments.
3. Refinance to a Lower Interest Rate – Over the past five years mortgage rates have fallen to levels that we haven’t seen for some time. This means it’s the perfect time to refinance a mortgage. Since your interest will be dropping, your overall monthly payments will decrease. Instead of paying the new low amount, you can continue to pay the same amount as before the refinance. The difference can then be applied to your principal balance.
4. Change to a Shorter Term Loan – Instead of having a 30 year loan you can opt to change to a 15 year loan. You will pay off your mortgage in half the time and save money on interest. The only downside is that you will need to be able to afford higher month payments.
Depending on your mortgage lender, taking advantage of these tips can be easy or hard. Most companies want you to continue paying on your loan for as long as possible because this increases their profits.
Have you begun to pay down your mortgage early?