7 ways to pay your mortgage early and without realizing it

According to the Urban Institute of the United States, more than 26.9 million Americans own their own home. Some bought their property with cash and in cash, while others reduced their mortgage year after year until they paid it off in full. However, two thirds of the citizens did not have that luck and had to apply for a mortgage in order to purchase their home. If this is your case, here we bring you some tips to be able to pay your mortgage early.

Were you not so lucky and do you belong to this large group of people who must pay their mortgage month by month? Well, you still have several options to join the ranks of homeowners who don’t have to pay more for their home. How? With these ways to pay off your mortgage early.

Opt for an advance payment

Every time you decide to pay a little more than the monthly mortgage payment, you reduce the main balance, that is, the capital. But before choosing this option, you need to know the basic rules:

  • First of all, check with your mortgage lender. Keep in mind that some lenders only accept additional payments at specific times or may charge you a penalty for prepayments.
  • Include a note in the additional payment. Why? Because you need to tell the bank or credit union that this excess should be applied to principal in order to reduce it. Otherwise, they will take it as a payment for the following month.
  • Don’t pay for a mortgage acceleration program. Think that earning money is not easy and you do not need to spend a large sum to accelerate the payment of your mortgage. In this article, you will find how to pay off your loan at lightning speed.

Note: If you want to check how much you could save on your mortgage payment, enter a mortgage calculator and perform the calculation. This will help you estimate how quickly you could end up paying for your house.

Or make biweekly payments

If paying an extra a month doesn’t appeal to you (for example, about $100 more than your monthly payment) or it does but you can’t commit to it right now, you may like biweekly mortgage payments much better. Making biweekly payments could shave 8 years off a 30-year mortgage, of course, depending on the interest rate on the loan.

But, What are biweekly payments about? Of the following. Let’s say your monthly mortgage payment is $2,000. To make biweekly payments, you just have to divide that amount in two and pay $1,000 every fortnight. By doing this, instead of keeping the 12 annual payments – which would translate to $24,000 – you would be making 13. Therefore, that extra payment of $2,000 will reduce your initial capital and help you pay off your mortgage faster.

Keep reading: What is the interest on a Wells Fargo mortgage?

How to set up a biweekly mortgage payment?

  • The first thing you should do is examine your mortgage statement. Find the principal and interest, and divide that number by two. For example, if the principal plus interest is $1,500, then your new biweekly payment should be $750.
  • Include the amount of taxes and home insurance in each month’s payment. In this example, that $1,500 per month -or the $750 fortnightly- will only cover interest and principal. In addition to that, you must also pay the part of the taxes and the insurance of the mortgage.
  • Contact your bank and ask if they work with biweekly mortgage payments. Some lenders receive biweekly payments, but others prohibit them or fine the user who makes them. Several even ask the consumer to pay an additional fee in order to switch to a bi-weekly payment schedule. If this is your case, don’t do it! There are other methods to pay off your mortgage fast.
  • If your lender is not open to biweekly payments, help yourself with a bank account. Although the bank does not accept the payment, this does not prevent you from setting aside the money each month to be able to pay your mortgage in record time. In this case, what you should do is open an exclusive bank account for your mortgage. Deposit biweekly just like you would with a payment plan like these, and use the money saved to pay off your mortgage each month.

Note: Biweekly payments will not give you all the benefits. If you want to further reduce the time of the mortgage and, therefore, the amount of interest, start making balloon payments to the principal.

What other ways do you have to pay off your mortgage early?

Every extra dollar you spend on your additional mortgage payment will help you lower future payments. Of course, this does not mean that you should acquire more debts or allocate all your income to pay off the loan. Even making just one extra payment each year on your mortgage will help you shave years off your term.

Here are some options that could help you with your mortgage payment. To see them in more detail, let’s take an example. Suppose we are talking about a $220,000 mortgage payable over a 30-year term that is subject to an interest rate of 4%. Then:

This modality will help you reduce the term of your mortgage by 11 years and will save you more than $65,000 in interest.

2. Bring lunch to work

What does lunch have to do with the mortgage? A lot and you’ll see why. If you save that $100 you usually spend eating lunch out and start taking your food ready to work, you will have extra money to add to your monthly mortgage payment. If you pay an extra $100 a month, you’ll end up paying off the loan three years early and save about $28,000 in interest.

Tip: If you can’t stop eating out, try to save at least $20 a month. If you do this and add it to your monthly payments, you can pay off your mortgage a year earlier and save more than $7,000 in interest.

Something similar would happen if you give up Starbucks coffee. According Acorns Money Makers, the average American spends about $3 a day on their beverage of choice. That’s $90 a month that, if you add to your monthly mortgage payment, will save you $25,000 in interest and reduce the term of the loan by four years.

3. Refinance the mortgage (or pretend you did)

The only mortgage that could be like a dream come true would be a 15-year fixed-rate loan with a payment no more than 25% of your income.. However, it’s hard to get something like that, right? The truth is that most mortgages are subject to a variable rate and a term of 30 years to pay. What you can do in this scenario is to refinance the mortgage and turn it into a 15-year loan. Or, if you have a very attractive interest rate that you do not want to lose, leave the term intact, but pay the loan as if it were 15 years.

Tip: If your mortgage is for 15 years, you could also do the same. After all, why pay in 15 years when you can pay in 10?

4. Reduce your square meters

Yes. We know that that giant house has you in love, but if you’re determined to get rid of your mortgage, you might consider selling your current home to invest the proceeds and buy a smaller, less expensive one for cash. Keep in mind that by doing this, you might even have money left over to invest, to open a certificate of deposit, to put into a top-yield savings account, etc. Of course, this is a radical alternative, since the ideal would be to acquire a house in the first moment with a comfortable price that you can afford – if not immediately – as soon as possible.

5. Don’t take on more than you can

Before you start looking for houses and contacting a real estate agent, make sure you are financially ready to commit to a mortgage.. Another tip we can give you is to make a list of affordable housing options that are 1) easy to afford and 2) meet your requirements. You could even decide to move to a state with lower cost of living, especially if you have a job that you can do from anywhere in the world.

Tip: If you can’t answer yes to the following six questions, it’s best to put your home purchase on hold:

  • Am I debt-free and do I have savings of -at least- three to six months of income as a reserve fund?
  • Can I afford -at least- a 10% down payment on my mortgage? or, even better, 20%?
  • Would I have enough cash left over to cover closing costs and moving expenses?
  • Is my monthly mortgage payment 25% of my income or even less than that?
  • Can I afford to take out a fixed rate loan for the remaining price of the house payable over 15 years?
  • Can I pay for maintenance and utilities for my next new home?

Note: To calculate how much you could pay on a mortgage month by month, don’t hesitate to use a free mortgage calculator.

Final ideas to pay your mortgage early

  1. Seek professional help to find the ideal home. If you are looking to buy a house that fits your budget or if you are ready to sell the one you currently have to exchange it for another, consult with a real estate agent who has enough experience to advise you the best possible. A real estate agent can help you make the home buying process easier and will also help you negotiate a good price for you with the landlord. In this way, you can ensure that you do not pay a penny more than necessary.
  2. Maximize your down payment. We won’t get tired of saying it. The best way to buy a house is in cash. Of course, not everyone can afford to pay cash for their home, but you could at least offset that inconvenience by putting together a good down payment. According to experts, you must have at least 10% of the initial of the house. 20% would be much better. Why? Not only because the initial is higher: also because by depositing that amount of money in the bank you will be able to get rid of paying the mortgage insurance (PMI).

Tip: Remember that the PMI of a mortgage has an annual fee equal to 0.5% or 1% of the loan amount. For example, if your mortgage is for $250,000, PMI will cost you $1,250 to $2,500 annually. If you can get rid of this payment, do it! You could use that money to pay off your mortgage early.

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