Strategies for paying off your mortgage early

Yes, you have signed a mortgage contract stipulating the terms and conditions of your payments for the next 30 or 15 years. This does not mean that you do not have the possibility to lower the total amount paid and/or to pay earlier and get free from such a financial burden. You have choices and it is up to you to make the most out of them. This means you have to stay alert, know your choices and use them appropriately. Not all available possibilities will fit so you have to examine all of them carefully and pick and choose the right one for you. Here are some recommendations you can follow:

• Refinance your 30-year mortgage into a 15-year mortgage

If your financial situation has changed for the better from the moment you signed up for a 30 year mortgage, or you just realized that you can make double the payments you owe, refinancing your 30-year mortgage into a 15 year one is a very good idea. You will pay less overall interest for the contracted loan and you cut dramatically the payoff period. A little warning here. Fifteen years is still a long period of time so you have to be sure when refinancing that you have the capacity to pay a higher installment even in bad financial times. Make sure the cash flow is there for the monthly payment.

• Just pay more with no refinance

If you have doubts regarding your long-term capacity to sustain a higher payment against your mortgage, don’t change the mortgage contract.  Just make the payments as for a 15-year mortgage and if things go bad you can lower the installments.

• Alter the payment timeline

You can make bi-weekly half payments or even 26 half-payments a year rather than 12. The additional payments will erase months, sometimes years from the remaining loan. It all depends when you decided to move from monthly payments to more frequent ones.

• Make a lump-sum payment

A lump-sum payment to the principal will lower the overall interest paid over the lifetime of the loan. Make sure that your lender understands that your payment goes to the principal. If paying your mortgage off is a priority, use all extra funds available towards this purpose: bonuses, tax returns, etc., they will all contribute to reaching your goal. Bi-weekly, monthly or lump-sum payments are decisions you should carefully consider, but they can save thousands of dollars in interest over the lifespan of your mortgage, allowing you to pay it off earlier.

• Keep payments the same and refinance at a lower interest rate.

Over the lifetime of your mortgage, the interest rate will change. Keep an eye on the market and refinance when interest rates are low. If you succeed in doing this you will pay less. In this way, you will get rid of your mortgage earlier. Be careful to take into consideration all costs generated by a refinance. The new lower interest rate should also cover these costs. Use a refinance calculator available over the internet as a support tool in this endeavor. Thus, you will know for sure if refinancing will save money over time, just make break even or lose money. When refinancing make sure that the upgrades to your property are reflected into an increased home value this will change for the better the private mortgage insurance.

• Refinance to get rid of mortgage insurance (PMI)

After you have reached an 80% loan-to-value ratio you can ask your lender to remove the PMI and redirect the amount that is usually 0.05%–1% of the annual loan amount, to the principal. The percentage seems small but in time it can add up to a significant amount. Some lenders allow new property appraisal to show the new value and your increased equity due to real estate market changes or due to home improvements performed can influence the private mortgage insurance. In conclusion, you have choices but in order to use them, you have to be active.  Use all the windows of opportunity, know the terms and conditions of your mortgage contract, the current legislation as well as market changes.