When people buy a home for the first time, they will resign themselves to the fact that they have a long road of mortgage payments ahead of them. A typical mortgage term is 25 years long. It can be pretty intimidating to think about paying it off before then because that could involve hundreds of thousands of dollars. That being said, it is much more beneficial to you to pay your mortgage off early!
Benefits of Paying Early
The primary reason for paying a mortgage off early is all the interest that you will save. The mortgage payment is made up of two different parts; the principal and the interest. The principal is the total amount that you have borrowed, and the interest is the cost of borrowing the money. Every month, you will be paying a percentage of each. If you manage to pay your mortgage off early, you will be saving money in the form of the monthly interest. This can add up to many thousands of dollars over the term of the mortgage.
Another benefit of paying off the mortgage early is simply having extra cash free every month. Without the mortgage payment to worry about, you can put your salary towards other things, such as investing or saving accounts, which can earn you profit.
Switch Payment Schedules
If you are currently paying a monthly mortgage payment, you could switch that to biweekly instead. This means that every two weeks you will make a payment of half the typical monthly amount. This is beneficial because the year has 52 weeks in it, so a biweekly payment schedule will result in 13 payments, rather than 12. Making an entire extra payment will result in the mortgage being paid off faster, and interest being saved.
Make Bulk Payments
Sometimes, a homeowner might find themselves with some extra cash on their hands. This could be from an inheritance, a gift, or a bonus from work. If you do not need the money for any other crucial purpose, you could put the cash towards the mortgage. Paying down the extra principal will reduce the overall term on the mortgage. Check your mortgage terms to make sure that you are able to make principal-only payments. Most mortgage lenders will allow it, but sometimes it is only allowable after a certain amount of mortgage term has gone by.
Refinance your Mortgage
When buying a home, it is common to enter into a longer-term mortgage, due to the individual’s current financial situation. However, as they proceed through their career, they may end up earning a higher salary. When they are in a secure financial position, it may be time to consider refinancing the mortgage to one with a shorter term. For example, a 30-year mortgage could be shorted to a 15-year one. Shorter loan terms will tend to have correspondingly lower interest rates. Over the term of the shorter mortgage, you will be paying more per month, but less overall.