A mortgage is often the largest debt for individuals. If you looked at the exact cost of the house you are living in taking into consideration the principal and interest payments over the life of the loan you would probably be shocked! It seems normal for most of us to just look at how much the monthly payments are without considering the total cost of the home.
Instead of being weighed down with the mortgage, you could opt to speed up the payoff process. Consider the following ways to pay the mortgage off quickly.
1) Refinance your existing mortgage to a shorter term – Most mortgages are for 30 years which makes the monthly payments lower. Contact your mortgage company or research current interest rates to see if refinancing is a better option for you. To illustrate, if a person has a 30-year mortgage with an interest rate of 7.5%, it might be in your best interest to refinance to a 20-year mortgage at 4.25% interest. Let’s take a look at the numbers:
- $225,000 home purchased with 20% down for 30 years at 7.5% interest.
Home Value: $ 225,000
Loan amount: $ 180,000
Interest rate: 7.5%
Monthly payment for 360 months: $1,258.59
- Refinance same amount at 4.25% interest rate for 20 years
Home Value: $225,000
Loan amount: $180,000
Interest rate: 4.25%
Monthly payments for 360 months: $ 1,114.62
MONTHLY SAVINGS AFTER REFINANCING: $143.77
SAVINGS OVER THE TERM OF THE LOAN: $185, 581.71
2) Making extra monthly principal payments – For a $180,000 30-year 7.5% mortgage, by paying an additional $50 per month you could save $40,288 in interest and pay the mortgage off 3.7 years quicker than the original loan. For a 20-year mortgage at 4.25%, paying an additional $50 per month will save you $15,959 in interest and will shave 3.02 years off your mortgage. While you may not be able to pay an additional $50 each month, any additional amount that you can pay will help chip away at the debt.
3) Dropping PMI – If you paid less than 20% down on your home, your mortgage company probably required PMI on the loan. PMI stands for Private Mortgage Insurance which is the insurance paid to the lender in case the borrower is unable to make the mortgage payments and goes into foreclosure. The insurance helps lower the risk for the lender.
Once you pay the loan down below 80% of the original mortgage, you can contact your lender to have the monthly PMI payments removed from your mortgage payment. The cost varies but you could save from $50 to $200 or more per month by removing the PMI.
I would advise you to take a close look at your mortgage this week to consider the ideas listed above. Even making a $10 extra payment per month could make a noticeable difference in the term of the mortgage and the amount of interest you pay.