Alright, so you’ve made the decision. Let’s explore some strategies for paying off your mortgage ahead of schedule. There are several methods to consider:
1. Monthly Regular (Extra) Payments
The most common approach involves making extra principal payments each month. Ideally, you can automate this process with your lender. Just ensure that when you commence these additional payments, they are applied solely to the actual principal, not a combination of principal and interest.
For instance, on a $200,000 loan at a 4% interest rate, an extra $250 per month can reduce your loan term from 30 years to 20 years.
2. Bi-Weekly Payments
Rather than making monthly mortgage payments, consider switching to a bi-weekly payment schedule. This results in 26 half-payments per year, equivalent to 13 full payments annually.
This strategy accelerates your mortgage repayment without significantly altering your cash outflow. Many lenders, including Quicken Loans, now allow automatic enrollment in this type of payment structure.
3. Refinance to a Shorter Term
To compel faster home loan repayment, consider refinancing to a 10, 15, or 20-year term. Prior to refinancing, it’s essential to have a good credit score, and tools like Experian Boost can aid in boosting your credit.
While there may be some transaction costs to consider, the lower interest rates and shorter terms might be the strategic move you need.
4. Rent a Room (House Sharing) and Use the Income
Become an Airbnb host and rent out a room in your home to occasional visitors. The additional income generated can be directly applied to your mortgage balance, facilitating an earlier payoff.
5. Mortgage Acceleration Software/HELOC
While the intricacies of mortgage acceleration software/strategies might seem complex, their actual workings and cost-effectiveness are often challenging to decipher. If the concept seems too convoluted or unclear, it’s advisable to steer clear of such strategies.
6. Lump Sum Payments for Early Mortgage Repayment
In the past two years, we’ve opted for this method, utilizing lump sum payments to settle our mortgage. Accumulating cash primarily from business success, we made a substantial payment of approximately $49,000 last month.
Whether it’s year-end bonuses, tax refunds, stock option returns, or a windfall from part-time ventures, consider earmarking significant sums for your mortgage. While there isn’t currently an automated method for this process, if you’re financially disciplined and confident in maintaining a modest lifestyle, it can be an exceptionally effective strategy.
The Practical Process of Early Mortgage Repayment (Making the Final Payment)
When employing the lump sum payment method for your final mortgage payment, you need to request the payoff amount. This figure may slightly differ from the actual mortgage balance seen on your statement or lender’s website.
You can make this request via a phone call or, as in my case, through the customer support chat on the lender’s website. Once you have the payoff amount, log into your personal checking account’s online platform and set up a bank draft payment. This incurs a fee of $20 but can be selected for overnight delivery.
Upon the lender receiving the final payment, they will apply it to your loan and send you a letter confirming that your mortgage has been entirely paid off.