Paying Off Your Mortgage: 5 Tips to Help Push Things Along
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Are you stuck with a mortgage that you will be paying off for the next 30 years? The financial burden can feel overwhelming. You still have to pay off the mortgage. However, it doesn’t have to take as long as 30 years. Here are five tips to help fast-track your mortgage payments:
1. Refinance to a Shorter Term
Most lenders offer a 30-year period for mortgage repayments. However, you can decide the repayment period yourself, and your lender will be obligated to go with your decision. To this end, it is advisable to refinance your mortgage to a shorter-term to avoid a 30-year financial burden.
The main advantage of a shorter repayment period is that you will be done with the mortgage quicker. Another crucial advantage is that you will save big on interest payments.
Shorter repayment periods come with a lower interest rate – as much as 0.25% lower, depending on the repayment period. Additionally, interest payments accumulate over time, and a shorter repayment period effectively wipes several years of interest payments off your debt.
However, you should be warned that you will be paying higher monthly payments. Your lender will also charge you to process your refinancing request. However, these extra costs are worth the amount of time and money that you will save.
2. Recast Your Mortgage
Recasting has similar benefits to refinancing: you will reduce the repayment period and save some money in the process. However, recasting works differently from refinancing.
Recasting your mortgage requires that you make a large lump-sum payment towards the principal. The lender then deducts this payment from the mortgage amount and adjusts the repayment period accordingly.
Your mortgage repayment period will be adjusted downwards depending on the size of your lump-sum payment. This means that you will be paying fewer interest payments, which also means that you will be paying less in the overall interest payments sum.
Recasting your mortgage is especially recommended when you have a low-interest rate – refinancing is more recommendable when you have a high-interest rate. Additionally, you can refinance to a lower interest rate and then recast. It is also worth noting that lenders charge to process recasting requests. Additionally, some lenders don’t support recasting.
3. Make Larger Principal Payments
Lenders were allowed to charge prepayment penalties for clients who paid more than agreed before 2014. This was unfair, which is why the law was changed on 10th January 2014. Clients can now make as large principal payments as they wish without incurring penalties.
Making large principal payments has two notable benefits. First, it will reduce the time required to pay off the mortgage, as the extra amount you pay will be deducted from the overall mortgage amount. Additionally, it will save you money in interest payments, depending on the number of months you shave off the repayment period.
It is especially advisable to make larger principal payments when you cannot pull together enough money to make one large lump-sum payment for recasting. Paying as little as $100 more per month will take the load off the whole mortgage.
4. Make Bi-Weekly Payments
Making bi-weekly payments is a neat trick that results in one extra payment every year. It works similarly to recasting or making larger principal payments.
Bi-weekly payments add up to a total of 13 monthly payments per year, instead of the standard 12 monthly payments. This saves you as much as 2.5 years on a 30-year repayment period – and thousands of dollars in the interest payments that you would have paid over that period. Bi-weekly payments are also more manageable and flexible than monthly payments.
Bi-weekly payments are not standard with many lenders. To this end, switching to this arrangement spontaneously may complicate your agreement with the lender. As such, it is advisable to consult with your lender before making payments every other month. It is also advisable to have a reliable cash flow before committing yourself to bi-monthly payments.
5. Make Large Lump-Sum Payments
Making large lump-sum payments doesn’t always imply recasting your mortgage. Nevertheless, it has similar benefits to recasting – and you don’t have to pay recasting processing fees.
Making large lump-sum payments will take a chunk off the mortgage amount. It will also reduce the repayment period and save you some money in interest payments. However, it is advisable to consult your lender before making lump-sum payments.
You don’t have to grow old while still paying off your mortgage. You can be rid of it earlier and save yourself some money in the process. These tips are practical and informed by finance experts.
*This article is based on personal suggestions and/or experiences. This should not be used as professional advice. Please consult a professional if applicable.