Owning a home is arguably one of the top goals for most people and securing a mortgage is the most common route to accomplish it. As of 2019, the total mortgage debt outstanding in the United States amounted to an approximate $16.01 trillion. And according to Experian, the average mortgage debt among Americans in 2019 was $213,599.
That’s a whole lot of money! Little wonder most mortgages come with a 30-year repayment plan. However, by taking that long to clear off your mortgage, you risk paying more than the principal in interests alone. Paying off your mortgage on time will not only help you to save on interest payments, but it will drastically free up your debt burden. In this post, we explore ways to accomplish that.
- Purchase a Home You Can Afford
When purchasing, you must think long term. It’s not only about qualifying for a mortgage. You also have to consider the fact that you’ll keep making payments for a long time to come. That’s why you have to define your budget.
Think about how much you can spare towards monthly payments and how mortgage payments will affect your finances. That way, you can buy a home that’s well within your financial reach to avoid the undue burden.
But if you’ve made the mistake of taking out a mortgage on a house that’s beyond your finances and you’re struggling to keep up with payments, you should consider selling it off. You can then use the profit to purchase a smaller home with more a manageable payment plan.
- Maximize Your Down Payment
If you can buy a home with 100% down, then go for it! Unfortunately, most people cannot. Schemes like FHA loans allow you to put as little as 3.5% down when buying a house. But as you can guess, the lower the amount you put down, the higher and steeper the mountain of debt you’d have to climb.
That’s why it’s recommended to pay at least 10% as a down payment. If possible, you should aim for 20% because doing so excludes you from paying private mortgage insurance (PMI), which typically costs anywhere from 0.5 to 1% of the loan amount annually. On a $250,000 mortgage, you get to save up to $2,500 yearly in PMI payment.
Maximizing your down payment minimizes the amount you’ll have to pay back. That way, you can clear it off more quickly.
- Convert to Biweekly Payments
Making biweekly payments can help you clear off your debt sooner. But how? In a normal mortgage setting, you make payments monthly. Biweekly payments allow you to split your monthly payment in half while you make payments every two weeks. For instance, if your monthly mortgage payment is $1,500, your new biweekly mortgage payment will be $750.
So, what difference does it make? Biweekly results in 26 half-payments in a year, which equals 13 monthly payments each year instead of 12. The great thing about this strategy is you will feel little to no added financial burden while you pay more yearly.
- Refinance Into a 15-Year Mortgage
Who says you have to use 30 years to clear off a 30-year mortgage? Many borrowers opt to refinance their mortgages to enable them to pay off faster. This is particularly recommended if your financial situation changes and you start making more money, either due to a higher paying job or investment returns.
By refinancing your mortgage, you drastically cut down the amount you’ll have to pay in interest. For example, if you get a $250,000 30-year mortgage fixed at 3.8 % refinanced to a 15-year mortgage fixed at 3.2%, you could save up to $104,253 in interest by just paying an additional $587 to your current monthly payment of $1,164. If you can cope, you should refinance your mortgage to an even shorter duration to save more.
- Make Extra Monthly Payments
If you make only the minimum monthly payments, it’ll take forever to clear your mortgage. This is because a huge chunk of your payment will go towards clearing the accrued interest. However, any extra payment over your minimum requirement goes towards clearing off your principal. By making extra monthly payments, you not only shove off the amount you have to pay in interest, but you also shave off the time it’ll take.
A natural consequence of this tip is to actively look for avenues that can help you contribute towards making more monthly payments. This may be proper budgeting so you can eliminate wastage and free up some cash. It could also be gaining a professional certification or starting a side hustle to earn more.
By paying off your mortgage on time, you get to relieve your debt burden early. While doing this requires sacrifice, commitment, and dedication, the absolute relief makes it worth it!
We understand the nuances associated with financial issues and we are here to help you navigate the complexities. Contact us here today for more information. We look forward to speaking with you.