If you don’t like the idea of making mortgage payments for the next 25 years, you’ll be happy to know that you might not have to. That’s right, you could pay it off sooner.
Learn why paying your mortgage off early could be a good idea and get a few ideas of how to pay it off fast.
Why pay your mortgage off early?
There’s more than one reason to pay your mortgage off before the due date.
1. Interest compounds on your mortgage loan
According to Investopedia, compound interest is “interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.”
You pay interest on your mortgage loan (calculated semi-annually based on an annual percentage of your mortgage amount), and the longer it takes for you to pay off your mortgage, the more interest you’ll pay in the long run. For example, if you have a $300,000 mortgage at 5% amortized over 25 years, you’ll pay $70,211.47 in interest over the course of the mortgage. But if you pay it off faster, say in 20 years instead, you pay $68,417.66 in interest and save $1,793.81.
2. Build equity in your home faster
The money invested in an asset, including real estate, is known as equity. As your mortgage balance decreases, (and/or as property values increase), your home equity increases. And when you pay off your mortgage, you own your home “free and clear,” which helps provide financial security.
3. Free up extra cash monthly
When you pay your mortgage off, your monthly mortgage payment ends. This means you can use that money for other things. You could build your retirement fund, renovate, buy an income property or simply enjoy activities you couldn’t afford when you had a mortgage.
Make extra payments to principal
When you’re learning why and how to pay your mortgage off fast, one of the first things to do is to check the fine print on your mortgage agreement regarding mortgage prepayments. When you make extra payments to the principal, it reduces the amount that’s used to calculate subsequent interest payments. Thus, it reduces your interest payments.
Look for a title like “Mortgage Prepayment Privileges” or “Mortgage Prepayment Penalties.” Many mortgage contracts allow borrowers to pay up to a certain percentage (for example, 10, 15, or 20%) of the principal amount (the amount you borrowed before interest gets added) in each year of the mortgage term without paying an extra fee or penalty. If you want to pay off the entire mortgage balance and have a closed mortgage, expect to pay a penalty. Contact your lender to find out exactly how much.
Use an online mortgage calculator to see how much time and interest you’ll shave off your mortgage by making a prepayment.
5 ways to pay your mortgage off faster
Depending on your financial institution and mortgage contract, you may have several options to pay off your mortgage faster. They could include:
- Double up your regular mortgage payments, with the additional amount getting applied directly to principal.
- Increase regular payments by a percentage annually, such as on the mortgage anniversary date.
- Make lump sum prepayments up to noted amount annually. Use financial gifts, bonuses, tax refunds or other windfalls to pay down your mortgage faster.
- Keep payments the same when you renew your mortgage to a lower interest rate instead of taking the new lower payments. The little extra gets applied directly to principal.
- Pay bi-weekly instead of monthly. Paying every other week lets you make 26 payments per year, which is equal to making one extra monthly payment annually.
If you’re unsure about paying your mortgage off faster, talk to your Investment Professional. They can help you decide if it makes good financial sense for you and your family.
