There are several ways to pay down a mortgage faster than the agreed upon terms. Below are several ideas to consider when trying to pay off a mortgage:
1) Refinance to a shorter term mortgage:
- 10 and 15-year terms offer lower rates than 20 or longer terms and will help save a lot of interest over the life of the loan. Make sure that the costs compared with the savings and the time expected to keep the mortgage makes financial sense (breakeven point).
2) Cancel PMI (Private Mortgage Insurance) ASAP.
- Certain loans require the PMI or annual fee for the life of the loan so you can’t cancel them.
- If allowed, try to pay down the balance within your means to get under the 80% of the value required to cancel the PMI.
- If you cancel the PMI, consider making the same payment you were before the cancellation, and this will apply extra to the mortgage which pays it off earlier, saving interest.
3) Pay extra per month to the principal and interest monthly payment.
- If you are saving money from paying off another debt, got a raise at work, or refinanced, use those funds to pay extra towards the mortgage balance and save interest over the long-term.
- Keep in mind when just sending extra money towards the balance, it does not lower the payment.
- Make sure you instruct the lender to apply these extra funds to the principal balance.
- If you have a specific goal of paying off in 10, 15, or 20 years, for example, ask your lender how much extra that you need to pay on top of your regular payment to meet that goal.
4) Ask for a recast or re-amortization of your loan when applying a lump sum amount to the principal balance.
- Many lenders will allow this, but make sure you ask the procedures and effect on the payment before sending the extra money.
- Rather than just lowering the balance and shortening the term, a recast will lower the monthly payment while keeping the same rate and remaining term on the loan.
- This is a great option for lowering the payment after selling another property, inheriting money, etc. without having to refinance and incur costs to lower the monthly payment.
- Ask for the procedure and cost to recast the loan. Lenders may charge up to $350 or so for a recast, there is usually a minimum amount of lump sum payment accepted, and the lender may want a signed letter requesting the recast.
To find out if a refinance makes sense for you, contact our team.