When you purchase a home and sign the documents at the closing table, you walk away feeling a great sense of relief. The search is over and you finally “own” a home. But want to know a dirty little secret? You don’t really own the home. Sure, your name is on the title, but you don’t actually have possession of the title. And until you pay off the outstanding amount on the loan, you won’t get the title. Miss a couple of payments and the bank – which technically has possession of the house – will take “your” property and liquidate it via foreclosure.
That might sound a little somber, but that’s the reality. Most people call themselves homeowners, when the reality is that they only own a small portion – maybe 10 or 15 percent of the house. And if they stick to the mortgage payment schedule, it’ll be 25 or 30 years before they own 100 percent of it.
The good news is that you don’t have to wait three decades to pay off your mortgage and become a genuine homeowner. Almost every lender allows for early pre-payments. By making additional premium payments each month, you can speed up the process and pay off your mortgage in just a fraction of the time. But how?
How Much Can You Save?
Before delving into some of the ways you can pay off your mortgage faster, let’s start with a little example to contextualize the financial significance of increasing your monthly payments. (Feel free to run a calculation using the specific numbers that apply to your situation using this calculator from Bankrate, but for illustrative purposes we’ll use some mock numbers.)
Let’s say your family just moved into a new house last year and took out a 30-year fixed-rate mortgage of $300,000 at 4.25 percent. After living in the home for 12 months, you and your spouse are suddenly overwhelmed by the fact that you’ll be making a $1,475 payment for the next 29 years. After some discussion, you both agree that it would be wise to increase your monthly payments by $525, bringing your total payment to $2,000 per month.
What would this do to your mortgage payment schedule?
Using rough calculations, your mortgage would be paid off 11 years and 7 months faster. More importantly, you would save $95,747 in interest – or nearly one-third of the original loan amount.
Most people simply assume that they’re paying off their mortgage faster when they make extra payments. What they don’t realize is that they’re also drastically reducing the amount of interest they’ll pay. Most of your payments are interest in the beginning anyway, which means the sooner you start, the more you’ll save.
6 Easy Ways to Pay Off Your Mortgage Faster
Okay, so paying off your mortgage faster is a good thing – but how do you do it? You might think you need to earn a massive six- or seven-figure annual income, but this isn’t true. More money certainly helps, but anyone making an average amount of money can pay off their mortgage faster. Here’s what it takes:
1. Set a Goal
The biggest challenge with paying off a mortgage is that it’s a long-term objective. Even if you’re trying to slash your mortgage term in half, you’re still reaching for something that’s 10 or 15 years down the road. It’s hard to stay focused on anything for that long if you don’t have concrete goals. Set an exact deadline of when you want to pay off your mortgage – even being as specific as which hour on which day. This level of specificity will keep you motivated.
2. Slash Your Expenses
Using the above example, you need to come up with an extra $525 per month. The first thing you should do is slash your expenses and get rid of things you don’t need. Here are some things you may be able to get rid of or replace with other things – along with the estimated cost savings.
- Cable – $60 per month
- Eating Out for Dinner – $200 per month
- Starbucks Coffee – $60 per month
- Cheaper Auto Insurance – $50 per month
By simply getting rid of cable, eating out less, brewing coffee at home, and opting for a cheaper car insurance plan, you could save roughly $370 per month. That’s not even counting things like packing your own lunches, carpooling to work, curbing online shopping, and buying in bulk at the grocery store.
3. Increase Your Income
Want to really kick it into high gear? Pick up an extra job on the side and increase your income. Whether it’s delivering pizza at night, driving for Uber on the weekends, or freelancing after work, you should be able to increase your income by a few hundred dollars per month without overwhelming yourself.
4. Let Friends and Family Know
Vacations, concerts, eating out, going to the movies, buying Christmas presents…these sorts of pressures can easily derail your plans if you aren’t careful. To improve your chances of staying on track, let friends and family know what you’re doing and ask them to be respectful of your new lifestyle.
5. Pay Extra Each Month
You may be tempted to accrue your extra money and leave it in your bank account with the goal of eventually making one lump sum payment, but this isn’t advised. Not only do you risk tempting yourself, but you also miss out on interest savings. The best strategy is to add a little to your premium payment each month and keep chipping away.
6. Use Your Tax Return
Did you know that the average tax refund is $3,050? While it’s tempting to use this money to pay for a vacation, buy a new TV, or upgrade your vehicle, consider throwing it at the house. Doing this over a 10-year period will equal more than $30,000 in premium payments.
Buy and Sell With Green Residential
At Green Residential, we’re consistently rated among the most trusted names in the Houston real estate market. Whether you’re buying or selling, we can help you manage the process with meticulous attention to detail. For more information, please contact us at your earliest convenience.