Having a mortgage can be stressful, especially if you have a high monthly rate. Paying off your mortgage early might cost a lot of money now, but you’ll save thousands over time without the added interest.
While it might feel impossible, it’s not! Once you know where to start, you can begin meeting all of your financial goals. When you’re ready, check out these X ways to pay off your home loan early in 2022. You’ll meet your goals sooner than you think!
1. Start Making More Payments
The best way to work on paying off your mortgage early is to make additional payments. You can make as many extra home payments as you can afford, so you don’t have to go overboard.
An option that many people like is making biweekly or weekly mortgage payments instead of a single payment a month. You can split up your normal payment among those weeks. Plus, you won’t have to worry about holding on to your money for an entire month. This method also allows you to negate some of that accruing interest.
Next, you can make additional payments when you have the money. Even making small extra payments can save you thousands of dollars in interest! An additional $100 to $200 monthly payment can save you tens of thousands. Plus, you’ll take years off the mortgage.
Many homeowners like this option because it doesn’t put as much pressure on them- there’s no penalty for not making an additional payment! If you can’t afford to make them consistently, you can always wait to make an extra payment or skip it.
2. Refinance the Mortgage
Another great option to pay off your home loan this year is to refinance it. Refinancing allows you to pay it off early by giving you a shorter loan term and a lower interest rate.
For example, you can switch from a 25-year mortgage to a ten-year one! This helps you lower the amount you’ll pay in interest drastically. Although, with a shorter term, your monthly bill will be higher.
VA refinancing comes with several benefits! You can use the equity from your home to pay off other expenses or use it to remodel. Refinancing your mortgage also allows you to pay it off decades earlier.
You need to make sure you’re getting a better mortgage when refinancing. You’ll want to choose options that have the following qualities:
- A shorter mortgage term
- A lower annual percentage rate (APR)
- A lower monthly mortgage payment
If you can refinance and get a better mortgage, you’ll pay it off much sooner! Making the change allows you to avoid thousands in interest and cuts years off the term. It can be a good idea to speak with an advisor to make sure you get the best refinancing option in your area.
When Should I Refinance?
It would be best if you refinanced when mortgage rates are low. It’s a good idea to get a rate at least 2% lower than your current APR. However, going 1% lower can make a huge difference, especially with a shorter loan term.
Overall, you should refinance when you feel comfortable with your finances. You won’t want to refinance and put yourself in a situation where you can’t make the payments!
You can also refinance the loan to make lower payments each month when you need to save money for other costs. Lastly, many homeowners refinance to use their equity to pay off other pressing debts.
3. Focus on the Principal
You can also make larger or more frequent payments toward your loan’s principal. This refers to the amount you first took out to get the home loan without the down payment you made.
Making principal-only payments save on interest. With a lower principle, the interest will grow much slower. The interest you owe comes from the principal- paying more on it every month slows the growth of your loan and makes it faster to pay off.
Paying extra to your principal also helps you build more equity, which you receive from refinancing your mortgage. If you suspect you’ll want to refinance in the future, making more frequent principal payments can pay off later!
4. Make Larger Payments
Next, you can start making larger monthly payments. You’ll want to begin the process by adding as much to your current monthly payment as you can afford. For example, you can add $100 to your monthly bill. If you have a higher budget later, you can include more!
However, you can start low and work your way up. You never want to pay more than you’re comfortable with. Starting with an additional $20 a month adds up, even if it doesn’t feel like much.
Even making a single extra mortgage payment a year reduces the term of your loan drastically. However, you won’t have to make a lump sum payment to reach that goal! Instead, divide your monthly mortgage payment by 12.
Then, add that 1/12 payment to each of your mortgage payments. Let’s do an example together!
Say you pay $1,000 a month on your mortgage. $1,000 divided by 12 is about $83. To make an extra mortgage payment over the year, you’d pay $1,083 each month. After 12 months, you’d have paid an additional $1,000 on your home loan!
While it might not seem like much now, it adds up. Paying more each month takes years off your loan, so it’s best to start as soon as possible.
Why Should I Pay Off My Mortgage Early?
Paying off your home loan early frees up money for other expenses. It allows you to avoid paying more interest as well. Plus, it helps remove debt, improve your credit score, and build equity in your home.
Overall, paying off your mortgage when you can comes with several benefits! The fastest way to pay it off is to refinance. Although, paying more frequently or adding more to your payments is extremely helpful.