“It’s not as hard as you might think to pay off your 30 Mortgage in 25-26 years. This article explains some simple ways that you can do it, as well as alternatives to paying an extra Mortgage Payment each year.”
DC Metro Realty Team – Denise Buck & Ed Johnson
For homeowners, one of the most burdensome financial albatrosses is mortgage debt, especially during retirement.
Your mortgage is likely your largest expense. Aside from hoarding money in an IRA or a 401(k), paying off your mortgage prior to retirement is critical. Once you enter retirement, healthcare costs are bound to increase, leaving less room to fit a mortgage payment into your retirement budget.
An effective way to cross the debt-free finish line faster is paying one additional mortgage payment per year. Aside from reducing the life of the loan, you’ll save money in interest expenses.
If you can’t afford making an extra mortgage payment at the end of the year in a lump sum, consider making mortgage payments every two weeks throughout the year, which amounts to 26 payments and accomplishes the same goal as a lump sum.
When you apply for a loan, you’ll have access to an amortization schedule, which shows how your monthly payment is allocated, either towards interest or principal. Your initial payments tackle interest, while later payments deeper into the life of the loan take care of principal. Making an extra mortgage payment expedites this process.
“You’ll get that 30 year mortgage reduced to 24 or 25 years with an additional yearly payment, since the amount calculated for principal and interest is based on the new principal balance,” says Dani Babb, founder and CEO of The Babb Group.
If it’s more financially viable to make bi-monthly payments, rather than a single lump sum, be sure to alert your bank ahead of time. The first of the two monthly payments will not be enough to cover the mortgage and the bank may not know what to do with the payment. Your lender could apply this money towards interest or even deem your payment as insufficient, in which you would be behind on your mortgage from the bank’s point of view.
“Tell the lender you’ll be making payments every two weeks, as opposed to once per month and ask them to allocate this money to what’s known as unapplied funds,” Babb adds. This way, you ensure your extra payments are actually applied towards your mortgage’s principal.
If bi-monthly payments are a stretch, consider adding just $50 a month towards the principal of the mortgage. Given how mortgages are amortized, with the interest at the front end, even small increases in the amount you pay per month can make a difference in paying off the mortgage sooner.
There are cases in which speedily paying off a mortgage lacks financial sense. If you have high-interest credit card debt, this should be your priority, since the credit card debt is likely at a higher interest rate than your mortgage.
Also, it may be more cost effective to refinance to a 15-year mortgage, where your rate is one or two percentage points lower than a 30-year mortgage, Babb says.
“Diverting additional money towards your mortgage isn’t always the best investment in terms of what you can do the money elsewhere, but it’s good for people who want to retire early or this is their only debt,” he says.
– Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE
