It is great to buy your own home but you can never really enjoy it unless you have completely paid it off. While you are still in the midst of your mortgage payments, you know that at any point, you can lose your house. One economic crash, a job loss or a sickness can compromise your finances and result in you losing that house.
There are tough mortgage problems that can compromise your financial future. The reality that we have no control over what will happen in the future is a scary prospect that should make you use credit wisely. This is especially true with a huge secured debt like a home loan. If you cannot manage this debt carefully, you might end up losing your home even before you have completely owned it.
Of course, the best way to secure that house is to find a way to pay off your home loan early. It is not an easy feat and there will be sacrifices along the way. However, once you make that final payment, you will find it to be very liberating and rewarding.
3 ways you can pay your mortgage earlier than planned
There are many ways to pay your mortgage so you can get out of debt earlier than your term. The key to complete your mortgage payments early is to increase your monthly or annual payments. Here are three strategies that you can use.
Make bi-weekly payments.
Let us assume that you pay $1,500 each month. If you stick to your monthly payment, you will make $18,000 each year. However, if you pay your mortgage every two weeks, your annual payment will be bigger. There are 52 weeks in a year. If you pay a half month’s equivalent of $750 every two weeks, you will end up making 26 payments. The total would be $19,500. The bi-weekly payment strategy will make you pay one month more.
Round up your payments.
Another option to make you pay off your home loan earlier is to round up your monthly payments. If your monthly payment is exactly $1,545, you can choose to pay $1,600 a month instead. This will make you pay $19,200 a month – which is $660 more than your minimum payment. If you want to make it bigger, like $1,700 a month, that would be a better arrangement and will get you out of debt faster.
Dedicate windfall payments to your home loan.
Finally, you can commit all your windfall payments and use it for mortgage payments only. This will not really affect your lifestyle now will it require you to make sacrifices. You can continue to live on the same budget. But when you get a bonus from work, a commission or even your tax refund, these windfall payments should be used to pay off your home loan. According to the data from the IRS.gov, the average tax refund is $3,385. Imagine making this extra payment towards your mortgage. You will not really feel it because this windfall is something that you were not expecting anyway.
There are other ways for you to expedite your freedom from home loans. You simply have to understand your financial capabilities to know how much extra payments you can afford to pay. Just make sure that you inquire about any prepayment penalties. There are some mortgages that will charge you if you pay more than the monthly requirement. Clear this up with your mortgage lender. If there is a penalty, calculate how much it will cost to pay it off versus the savings you will get by paying off your home loan early. Sometimes, the penalty is nothing compared to the savings. If that is the case, then it is okay for you to pay the prepayment penalty.
Benefits of paying your mortgage early
You may be wondering, why do you have to exert all the effort to pay off your home loan if the interest rate is not big anyway? Why put yourself through the required sacrifices to make the extra payment?
There are a couple of benefits that you need to be aware of.
- You can save on interest. The most obvious are the savings that you will get. If you can lower your payment terms, you can decrease the interest amount that you have to pay during the term of the loan. You can use the savings to invest in something worthwhile. You might be able to save enough money to help you be financially ready for early retirement.
- You can increase your net worth. As you pay off your home loan, the equity in your house will grow bigger. That means your net worth will continue to grow. This increase will help you build up your assets over time. You can choose to use this equity to invest it in something else or you can just let the market grow its value over time.
- Lower chances of the need to refinance. Another reason to contribute more towards your loan is to lessen that chances of refinancing. Sometimes, people who have to refinance are those who encounter problems over the course of their payment terms. Things may seem financially okay at first. But what is something happens to your finances? If you pay it off faster, you can lessen the chances of an economic crisis putting your mortgage payments in danger. According to MBA.org, the refinancing share in the mortgage industry decreased to 55% of the total applications. Experts believe this is caused by the rising interest rate in the market. If the rates are rising, you want to make sure that you will not put yourself in a position that will make refinancing a necessity.
- Less stress. Finally, and probably the best benefit is being free from stress. If you pay off your home loan, this is a huge burden that you can remove from your chest. You do not have to worry about payments and you can free a huge amount from your budget. Your home will no longer be in danger of foreclosure and you can truly enjoy your house because it is totally yours now.
Where to get the extra money to make bigger mortgage contributions
While you may understand the importance of paying your home loans early, you have to know where you can get the money to pay extra. There are a couple of option that you can probably look into.
Get a side gig.
The first option is to get a side gig. You can always get another source of income. Not only will this give you the extra money to pay your mortgage faster, it can also help you diversify your income. That will give you more security in your income. According to a study done and published by Selz.com, 16% of adults who are working start a side a business because they want financial freedom or personal fulfillment. Not only that, the same study revealed that side businesses have an average earning of $24,500 a year. That is a huge amount to use on your home loans – which is a great way to cut short your payment terms.
Sell items you no longer use.
Another way to get the extra income is to declutter your home and sell off the other things that you are no longer using. You can use the profits to pay off a portion of your home loans. You can do a yearly yard sale that will help you organize your home and use the profit to pay a portion of your mortgage. You can time this during your spring cleaning. You can maintain an organized home and at the same time, make lump sum payments on your house.
Earn from your house.
Finally, you can earn off of your house. This is literally using your house to get more money. The best way to do this is to rent out an extra space in your house. Here is a video from ABC News that features a family who wishes to earn extra from an extra space they have at home. This video features some tips that you can use so you can use your house to pay for its own mortgage.