How to Pay Off Mortgage Earlier?
The main advantage in paying off your mortgage earlier is to save a lot of money in interest payments. On a 30-year term, one extra mortgage payment per year may save you over $50,000 in interest payment and cut down the mortgage terms by up to 5 years. This article shows you 3 ways on how to pay off mortgage earlier.
How Do Mortgage Payments Work?
As we all know that when we take out a home mortgage to finance the purchase of our dream home, we have to pay the bank back in monthly payment plus interest.
On a fixed interest mortgage, the monthly payment will be the same throughout the loan term. If your mortgage term is 15 years, your monthly payment will be the same for each of the monthly payments. The same goes for a 30-year term mortgage.
However, many people don't understand how the underlying monthly payments work. At the beginning of a mortgage term, most money is paying towards the interest with little money to pay down principal. The money that goes into paying down principal gradually increases as time passes. On a 30-year term, it could take a decade or more before principal payments exceed interest payments each month.
By looking at an amortization schedule, you will learn exactly how much your money is paying towards interest and principal for each payment.
Can I Payoff My Mortgage Early?
There are many ways that you can pay off your mortgage early. You can use biweekly payments instead of monthly payments. By using biweekly payments, you are essentially making one extra payment each year.
You can also make one-time payments at the end of the year if you get a bonus from your company or receive money from your tax returns. You can also set up extra payment to pay extra for each payment, such as $200 more on top of your monthly payments.
No matter which forms of payments that you choose to pay down your mortgage, there are two things that you need to do first.
- Talk to your bank or lender first. Make sure there are no fees or penalties for making extra payments or paying down your mortgage earlier.
- Make sure the extra payments that you want to pay are for paying down principal and not for interest. Lowering your principal is the only way to save money on interest in the long run. This is very important, make sure you talk to your bank to have it set up correctly so you don't get any surprises down the road.
How To Payoff My Mortgage Early?
There are three ways that you can pay off your mortgage earlier, you can either make more money, cut down your spending to save more money, or refinance your house if the rates are lower.
How to Save More Money to Payoff Your Mortgage Earlier?
Here are 10 tips on how to cut spending and save more money to pay off your mortgage early.
- Make your own coffee - Yes, you heard that right, make your own coffee. The average American drinks 2-3 cups of coffee per day, and each coffee costs about $4. If you make your own coffee every morning instead of grabbing one from Starbucks, you could save up to $250 each month.
- Bring your own lunch to work - If you live in a city like New York City where the cost of living is super high. Each meal could cost you over $10. When you bring lunch to work, you can save up to $300 per month. Simply cutting eating out for lunch and making your own coffee, you can save up to $550 each month. When you put this money into paying off your mortgage, you can cut 5-7 years for your mortgage terms and save anywhere from 50k to 100k in interest payments.
- Buy groceries in bulk - If you have a family of 4 or more, try to always buy your groceries in bulk from wholesale places like Costco, Sam's Club, or BJ's. When you buy from these retailers, you can save a lot of money on groceries and necessities than if you were to buy them from a deli or a local supermarket.
- Buy smart - Buy summer clothes in the winter season and buy coats or other winter clothes when the winter season is over. There are usually huge discounts when merchants are getting rid of their inventories to make space for new products when a new season begins. By buying summer clothes in winter, you will get your clothes at a much cheaper price, sometimes it could be 75% off from their original price. Imagine how much you can save for a family of four or more.
- Upgrade your phone once in 3-4 years - Instead of buying a new phone every year, you can choose to delay your upgrade cycle. The average smartphone costs about $500-$1000 these days depending on whether you are getting an iPhone or an Android phone. Every year, there are new phones coming out with better specs, but there are rarely any differences in the core functionalities. If your old phone still works perfectly, why get another one? Your mobile carrier will give you the option to make payments in much smaller monthly installment plans. A $20 extra payment a month on your phone bill may not seem like a lot, but every little thing adds up quickly.
- Use public transportation - Instead of taking a cab for your daily commute, try to use public transportation as much as possible. If you need to go somewhere, leave the house earlier and take a train or bus instead of a Taxi or Uber. You can save tons of money with public transportation if you live in a city like New York City or Los Angeles.
- Pay off your credit card - Credit card companies charge an outrageous interest rate for outstanding balances. If you can afford to pay off your credit card, there is no reason to make partial payments and end up paying for interest on your balance. Carrying a balance on your credit card will not improve your credit score. If you have multiple credit cards, start paying off the one with the highest interest rate.
- Sell your old clothes and gadgets - Sell the things that you no longer want or need such as old clothes or laptops. Instead of throwing your old stuff away or keeping them to clutter your closet, you can get rid of them on eBay or Craigslist for extra money.
- Buy only the things you need - Instead of buying the things you want, try to only buy the things that you need. Online shopping makes it really easy for people to do shopping 24 hours a day and 7 days a week while in their pajamas. Everywhere you go online, there are advertisements that tell you to buy this and buy that, it is hard to resist the temptation not to spend money. Many people frequently visit deal sites and end up buying lots of things that they don't need. The only reason they bought them was that these items were on sale.
- Save first spend later - Each month, try to put an extra 10% or more of your paycheck into your mortgage payments before you start spending. Most people do the exact opposite. When they get their paycheck, they would spend it first and plan to put whatever is leftover into their mortgage. Unfortunately, most of the time, there wouldn't be anything leftover. When their salary increases, they would always find a way or excuse to spend more money.
Spending more money doesn't necessarily make you happy. Sometimes it is just a routine. By building a good habit of spending, you can stop wasting money on unnecessary stuff, and use that extra money you save to pay off your mortgage, use it for retirement, or investment.
How to Make Extra Money to Pay off Your Mortgage?
Another way to get more money is to of course make more money. With the Covid-19, more people are working from home than ever. There are part-time jobs that you can find online to increase your earnings. You can even offer services on sites like Fiverr in exchange for money.
You can also try to find work on freelance sites that allows you to work on your own time. These jobs are highly flexible since you will be working from home, and you can use the extra income to make payments toward your mortgage.
Content writing is a high-demand field in the online space. If you can write well, you can become a high-paying content writer or charge a high fee on Fiverr to sell your writing work. You can also use your writing skills to start a blog and make money from blogging. However, blogging takes time and effort and it will likely take at least a year of writing before you can see any meaningful income flowing in.
If you hate writing, that's fine. You can browse around Fiverr or any other freelance website to see what kind of services other people are offering. There should be something that you can offer to the world with your skills and charge a fee for it.
How to Pay Off Your Mortgage by Refinancing?
You can consider refinancing your mortgage if the mortgage rates are lower now than the time that you bought your house. With the Covid-19 going on throughout 2020 and continuing in 2021, the mortgage rate is lower than ever. You can check with your bank to see what the costs are and how much you can save in refinancing. You can use the refinancing calculator to get a rough estimation of how much you can save.