Should You Pay Off Your Mortgage?
Paying off a mortgage early can have a number of benefits. Over the life of the loan, a homeowner could save significantly on interest costs. Paying off a mortgage early can also help when it comes time to focus on other financial goals, like retiring comfortably or sending a child to college. Paying down a mortgage faster can help even before the loan is fully paid off completely, because the more money homeowners put toward the principal of the loan, the more equity they build. And more equity means more borrowing power that can be used for other purposes.
Practical and effective strategies to pay off a mortgage faster can vary from borrower to borrower, depending on the original terms of their loan, their initial down payment, and their current financial circumstances. However, for most people, there’s an option or two that can work.
The Best Ways to Pay Off Your Mortgage Faster
It’s really important to find the right strategy. The right strategy is one that won’t put more stress on the rest of the budget, sacrifice the ability to meet emergency needs, or even deprive homeowners of all the pleasures of life. So think about your entire financial picture when you think about paying off your mortgage faster, and talk to a Bethpage mortgage expert too. We can help you understand the effects of different strategies on your repayment timeline and potential savings.
Pay off your mortgage faster with one or a combination of the following methods that is best for your financial situation:
- Make extra mortgage payments
- Pay more than the minimum amount
- Early term pre-payment
- Recast your mortgage
- Refinance your mortgage
Making Extra Mortgage Payments
As time goes on, homeowners may find themselves in a position to make extra payments towards their house. Perhaps they earn bonuses or sizable sales commissions or some other kind of regular or irregular extra money. Even a few extra payments here and there can make significant differences over time:
- Save on interest
While there isn't much of an exciting initial payoff in interest, it can eventually accrue into significant savings. You can use our mortgage extra payment calculator to see how much you'd save on interest if you make additional payments towards your home loan.
- Shortening the loan term
For homeowners tied into a 30-year mortgage loan, it might see that payments will go on forever. However, making extra payments can help shave years off the mortgage loan term and leave them home-debt free just in time to focus on other goals like retirement.
- Build equity
Any amount of money homeowners put towards the principal amount of their loan automatically builds equity. Extra payments build equity the moment the payment is made. That equity can be used as collateral for a line of credit to finance other goals or can be liquidated when the property is sold.
Whether or not homeowners should make extra payments on their mortgage depends on the rest of their financial picture. If they have considerable high-interest debt, for example credit card debt or an expensive car loan, they may save more and be in better financial shape if that is paid off first.
Paying More than the Minimum
Income level tends to rise over time. Especially for homeowners with fixed-rate mortgages and steady payments, it can be a good idea to apply a portion of income increases to their mortgage payments. Just as with making extra payments, paying more than the minimum each month can give homeowners significant savings on interest, shorten their repayment time and build equity faster.
This strategy should generally be used only for mortgage loans that do not have prepayment penalties. Homeowners who are thinking about this strategy should also consider their entire financial picture, including the potential advantage of diversifying their investments.
Many homeowners may not be able to afford extra payments at the beginning of their loan terms. However, with adjustable-rate mortgages, it can be very beneficial to tackle larger payments while the rate is still relatively low. Once the initial introductory rate period closes and rates begin to adjust to the market, especially if rates are rising, minimum payments may get higher and it will become more difficult to get ahead.
Recasting is a request for a recalculation of the amortization schedule of an existing loan. If borrowers have prepaid a substantial amount of their loan balance — through a substantial lump-sum payment, extra payments, or paying more than the minimum over the years — they may be able to ask their lender to recalculate their monthly payments based on their lower-than-projected loan balance. This will keep the term of the loan the same but can lower required monthly payments and interest costs over the life of the loan.
Recasting does not require requalifying for a loan. It can enable homeowners to adjust to a lower level of income, for example if one spouse retires, or spend more money on other financial or lifestyle goals.
Refinancing Your Mortgage
Some homeowners may be able to pay off their mortgages sooner by refinancing. Mortgage refinancing means replacing a current home loan with a new one. Homeowners can get a new loan with a shorter term to pay off a house more quickly. They can choose to reduce the term by making higher minimum payments or, if loan rates have gone down substantially, they may be able to keep their payments the same and still shorten the loan term.
Just as when a homeowner took out an original mortgage, they will have to go through a qualification and approval process for a new loan. If there have been any recent issues with their credit, it’s possible to not qualify, even if they already have a mortgage. Also, if interest rates have gone up, refinancing makes little sense. It’s better to keep the original loan and use a different strategy to pay it down more quickly.
Let Bethpage Help You Pay Off Your Mortgage Faster
If refinancing seems like a good option for you, get favorable rates and terms with a Bethpage home loan. Check out our competitive rates right away and get started with our Mortgage Quick Apply form. Our mortgage experts will walk you through the rest of the process, answering all your questions along the way.