Nothing can trigger that sinking feeling in the pit of your
stomach faster than looking at your mortgage statement and seeing those dreaded
lines: "360 payments" and "Payoff Date: 2044." The notion
of taking out a loan in your 20′s or 30′s and finishing the payoff in your 50′s
or 60′s can be daunting.
But you don't need to adhere to a 30-year schedule. According to Trulia,
here are seven ways you can accelerate your repayment clock.
#1: Refinance into a 15-year or
20-year loan
Although a
30-year mortgage is considered the "normal default," most financial
institutions offer the option of taking out a 15-year or 20-year loan as an
alternative. These loans are amortized on an accelerated schedule, which means
that your payments will increasingly be applied to principal reduction, rather
than interest.
Contrary to popular misconception, a 15-year loan isn't double
the payment of a 30-year loan. Yes, you'll face a larger payment — but not double. Why?
Your mortgage payment consists of four factors: Principal,
interest, taxes and insurance. Your property taxes and homeowner's insurance
will stay the same, regardless of the length of your loan, which means the only
two variables that change will be the (remaining) principal and interest.
Each month you'll divert a larger chunk of your immediate
earnings toward your interest and principal payments. However, your total
interest paid over the life of the loan will drop, for two reasons: First,
you'll be reducing principal more quickly, and second, 15-year and 20-year
loans are usually granted at a lower interest rate.
#2: Make payments as if you've
refinanced
But here's
the tricky follow-up question: Should you refinance? Or should you simply make
extra payments as if you've
refinanced, even if you remain on your original loan?
There are two major advantages to refinancing from a 30-year
loan into a 15-year loan: You'll be forced to make higher monthly payments
(which result in a faster payoff) and you'll enjoy a lower interest rate on
your loan.
But it comes with drawbacks, as well. First, you'll lose
flexibility. If you face an emergency (like a job loss or a health crisis), you
might not be able to afford the higher payments.
Second, you'll endure another round of closing costs, which will
add up to a few thousand dollars. (You can roll this into the new loan, if you
don't have the money available right now.) As a result, it will take you a few
years to reach the "break-even" point: the point at which the interest
savings from the new loan outpaces the transaction costs of refinancing.
If you're already close to the end of your mortgage term, or if
you're willing-and-able to make such substantial extra payments that you can
close out your current mortgage within a few years, then it may not make sense
to refinance. Why not? Because you won't hold the mortgage long enough to reach
the "break-even" point.
If you're concerned about either of these two drawbacks, forget
about refinancing and concentrate on making enough extra payments to squash the
rest of the loan.
#3: Refinance into a 30-year
with a lower interest rate
Did you take
out a mortgage loan prior to the recession, when interest rates hovered around
5 to 6 percent?
If so, then you may be missing out on an opportunity to reduce
your interest rate — even if you stick with a 30-year loan.
If you have strong credit and a low debt-to-income ratio, talk
to your lender about refinancing into a 30-year loan at a lower interest rate.
(Ideally you'd refinance into a 15-year or 20-year loan, but if you can't
afford the higher monthly payments, then refinancing into a 30-year loan at a
lower rate is a strong second choice.)
If you refinance into another 30-year loan, your monthly
payments will drop, rather than increase. While this will save you interest
over the life of your loan, it won't accelerate your pay-off date. (In fact, it
may extend that date even further out into the future.)
But there's an effective work-around.
Refinance into a 30-year mortgage with a lower rate, and then
continue making the same monthly payment that you were
previously making. This "extra" money (the gap between your new,
lower monthly payment and your original monthly payment) will get applied to
the loan as an extra principal payment. And this will accelerate your payoff
date.
In other words: Plan to continue making the same monthly payment
that you're currently making. Your budget won't change. But with your
refinanced mortgage, more of that money will get applied to the principal.
#4: Challenge your tax
assessment
By now,
you've contemplated several refinancing options. Let's focus on another area of
your mortgage.
Remember, your mortgage consists of four factors: principal,
interest, taxes and insurance. And your property taxes are based on the value of your house, as assessed by the county.
But what if the county hasn't valued your house correctly? Many
local governments are still working with pre-recession assessment values.
If you suspect your house is overvalued, challenge your tax
assessment with your county. If they rule in your favor, your tax rate will
decline — which means your monthly payments will drop.
Then, continue making the same payment that you're currently
making. This "extra" money will go toward reducing your principal and
interest, speeding up your payoff date.
#5: Find cheaper homeowners
insurance
You can
probably guess where this next point is heading. The lower your homeowners
insurance premiums, the less you'll need to pay each month.
Shop around. Ask if you can bundle your car and home policy in
order to take advantage of a lower rate. Request a higher deductible.
If you can lower your homeowner's insurance premium, your
monthly mortgage payment will drop. Keep making the same payment, though, so
that you can siphon this difference toward accelerating your payoff date.
#6: Make bi-weekly payments
Instead of
making a monthly payment, make a biweekly mortgage payment. If your mortgage is
$1000 per month, for example, make a $500 payment every two weeks.
How does this help? There are 26 "biweekly pay
periods" each year, which means that you'll effectively send one extra
month's payment to your mortgage lender every year — without
"feeling" it.
#7: Monetize or downsize
Finally, if
you really want to be free of your mortgage, you could always downsize into a
cheaper home. Sell your current home and use the equity to make a hefty
contribution to the cost of the new one.
If that idea doesn't appeal to you, then monetize your existing
home. Rent out your guest room. Convert the basement into an apartment, and
find a tenant. Build an apartment over the detached garage.
Source: Trulia.com