For a majority of Americans, the three main retirement goals are freedom from financial worries, traveling, and relaxing with family members. Financial freedom can include paying off a mortgage as it is one of the biggest monthly expenses. Eliminating it before you retire might make sense, especially if you expect a fall in income. It will help stretch your retirement savings and allow you to retire more comfortably. So, how can you pay off your mortgage sooner?
Here are a few mortgage-busting strategies to help you reach your goal of a mortgage-free retirement.
1. Choose a 15-year or 20-year term mortgage
You will need to choose your mortgage term with care if you are purchasing property later in life but want to make sure you repay it before retirement. If you are in your mid-to-late 40s and plan to retire in your 60s, a 15 or 20-year mortgage term may be the best option for you. If you take out a 30-year mortgage, your monthly payments may be cheaper, but your mortgage may not get paid off by the end of your career.
A shorter-term mortgage may seem intimidating since you will be paying a higher monthly payment. However, this amount may be more accessible than you think. Furthermore, a 15-year or 20-year term will have a lower interest rate than a comparable 30-year term product, reducing the difference in payments between the two options.
2. Create A Bi-Weekly Mortgage Payment
If your monthly budget is a bit tight let the calendar do the work for you. Divide your monthly payment into two equal installments and pay every two weeks. This strategy results in 26 half-payments each year, or 13 full monthly payments. An extra monthly payment you might not even notice! This is an excellent method to shave years off the life of a loan while also saving tens of thousands of dollars in interest.
For example, if your monthly mortgage payment is $1,013.37, then by the end of each year you would have made an additional payment of $1,013.37 by paying bi-weekly. With this strategy, you would reduce the length of your mortgage to 25.75 years and save $26,678 in interest!
3. Make Extra Mortgage Payments
Additional payments are always a good idea, but make sure your bank won’t charge you any early payment costs first. Every dollar you pay over and above your usual monthly payment reduces your principal balance and helps you get closer to paying off your debt. That doesn’t imply you should start making double payments every month. For example, putting an extra $100 per month towards the principal on a $200,000 loan with a 5% interest rate and a 30-year term can save you $36,000 and cut your payoff time in half.
You could also make an extra monthly payment every three months. Making four extra payments in a year might reduce your due date by ten years. However, remember to specify to your lender that your additional payments are for principal, not interest. Otherwise, your lender may apply the funds to future monthly payments, leaving you with no savings.
Also, pay off the loan when the interest is the highest, as the majority of your monthly payment goes towards interest rather than principal for the first several years.
Rounding up is another strategy to significantly shorten your mortgage term. Round up your monthly payments to the next largest $100 figure. Instead of $753 pay $800, or $900 instead of $870.
For example, if you are 40 years old and have recently obtained $200,000 on a 30-year mortgage and the annual interest rate is 4.5%, your monthly payment will be $1,013.37. But, if you round it up to $1,100, you will be debt-free in 25.4 years, or at the age of 65. Rounding up will also reduce your total interest paid on the loan by $28,377, which will go a long way towards allowing you to live the retired lifestyle you desire.
5. Refinance When Interest Rates Drop – Choose A Shorter Loan Term.
Refinancing your mortgage when mortgage rates fall can cut your interest rate, lower your monthly payment, and help you secure new loan conditions. A refinance can also extend your mortgage term by another 30 years. But, if you want to pay off your mortgage before you retire refinance to a 10-year, 15-year, or 20-year mortgage. A shorter-term may be more in line with your original payoff date, allowing you to take advantage of a better mortgage without having to prolong your loan payments period much.
If you are looking to refinance your mortgage or considering a shorter mortgage term contact one of our experienced loan professionals who will assist you in figuring out a strategy to meet your specific requirements. If you have any other mortgage queries do get in touch today. Our loan experts are always there to help you.