Paying off the mortgage early is “in”.
Refinancing to take money out of our
homes is “out”. Living through the
foreclosure crisis, more people want the security and the psychological benefit
of owning their home free and clear, and the sooner the better.
If you want to pay off your mortgage early,
you'll find plenty of experts recommending ways to do it. All strategies work,
but you'll find some methods of paying off your mortgage are safer, faster, and
more painless than others.
Compare these ways you can pay off your
mortgage early, starting with the simplest and moving toward the most complex.
Just Pay More
If you want to see magic, start playing with mortgage calculators and see how
adding a little payment to your principal here and there can shorten the length
of your loan. You can use mortgage calculators to see how $100 or any other amount added
to your payment reduces your interest and shortens the length of your loan.
If you pay a little more principal, you get a bonus. The
lower your principal gets, the more every payment from then on is applied to
principal, as less goes to cover interest expense.
If nothing else, round your payments up, recommends Tracy
Piercy, CFP and CEO of MoneyMinding.com. She says that when people have a
payment for $644, they think of it as $650. Why not just pay $650? An extra $6
a month on a $200,000, 30-year loan can save you four payments at the
end of the mortgage loan.
*Note - When you pay extra, make sure the extra is
applied to the principal balance, not just set aside for the next payment. And
before you make extra payments, read your contract and make sure you won't have
to pay prepayment penalties.
Refinance
with a shorter-term mortgage
You can refinance into a mortgage for 10, 15 or 20 years,
but 15-year mortgages are the most common. Your payments will be higher on a
15-year loan, but perhaps not as high as you think, especially if you can refinance with a lower interest rate.
One advantage of a 15-year loan is that you're committed
to the higher payment. There's no dithering about whether you can afford to pay
extra this month.
With a 30-year, $100,000 loan at 5 percent, your
principal and interest payments are $537. At the same rate, but on a 15-year
payoff schedule, your principal and interest payments are $791. That's $254
more a month.
To get the effect
of a shorter-term mortgage without the risk, take out a 30-year loan, but make
payments as if you had a 10- or 15-year loan. "You just make increased
payments. You're in control, not the bank," Piercy says.
Biweekly payments – (My Favorite)
Biweekly payments take advantage of the fact that there
are 52 weeks in the year and 12 months. If you pay half your regular mortgage payment
every other week, you'll have made 26 half-payments, or the equivalent of 13
full monthly payments, at year's end. The
extra annual payment can chop about six years off a 30-year mortgage.
You shouldn't have to pay an outside company to set it up
for you. "I hate the idea of having to pay a third party for something the
consumer(s) can do on their own," says Cathy Pareto, MBA, a certified
financial planner in Coral Gables, Fla. "Why pay the extra fees if you can
avoid them and still accomplish the same goal?"
Check if your bank will set up a biweekly payment plan.
Some banks do it free; others charge. Ask the bank to credit extra payments
toward principal so you save more on interest expense. Some banks set aside
extra payments until the end of the year.
Use
money merge accounts (the Australian method)
In Australia, mortgages are generally set up like home equity lines of credit,
or HELOCs. They double as checking accounts, thus the term "money merge." When you get
paid, you deposit your check into the account, and as you spend money you take
it back out again. You hope to put more money in every month than you take out.
With a mortgage using the
Australian method, interest is calculated daily instead of monthly, and because
the money spends as much time as possible in the account before you take it
back out to pay bills, you save on interest expense.
But Dr. Don, a Bankrate.com
columnist, writes: "I just don't think the typical homeowner benefits from this
type of mortgage loan." Typical homeowners don't see enough reduction of
their interest expense to make this method worth it for them, according to Dr.
Don.
Some money merge programs require
you to buy software for thousands of dollars. However, there's no magic formula
for shifting your money around. "You don't need software to do that,"
Piercy says.
*Note - The biggest downside to
the money merge plan is that it requires great discipline. Don’t do it unless you understand cash
management.
By Sally Herigstad, for
Bankrate.com
Read more at Bankrate.com http://www.bankrate.com/finance/mortgages/4-ways-to-pay-off-your-mortgage-earlier-1.aspx