Every homeowner dreams of the day they can burn their home mortgage note because the entire balance has been paid. There are some limitations for new mortgage loans that carry early pay-off penalties, but most banks will assist the homeowner by answering questions concerning the best methods to pay the balance down more quickly. Work directly with the lender and avoid anyone who promises to make the payments on your behalf. Embrace one of more of the following strategies to work toward financial freedom by eliminating that last long-term debt.
1. Pay extra principal – Additional principal payments of $25, $50, or $100 each month paid consistently throughout the year will shave years off the entire mortgage balance. Pay the full mortgage amount each month and add an additional $50 consistently for one year. Each time the statement arrives, compare the values against the previous statement. Highlight the outstanding principal amount and keep all of the statements together. If doubt of progress arises, look back across the previous statements and note the progress. Some mortgage statements also have a projected date when the final payment will be due this date should change as the principal amount decreases.
2. Reduce other expenses – Choose one or two seemingly frivolous expenses that can be eliminated from the monthly budget until the mortgage is repaid. Those expenses can be reinstated once the goal is reached. Add the entire dollar amount from the saved expenses to the mortgage payment every month. Continue to monitor the monthly progress reported on the mortgage statements.
3. Make extra payments – Whenever the budget will allow, make an extra full payment throughout the year. Monitor the drop in the principal amount reported on the monthly mortgage statement. The entire extra payment will be applied to the principal without any money being applied to the interest due on the loan.
4. Pay one additional payment annually – Commit to making one extra mortgage payment with the calendar year. If $1000 is paid against a 30-year mortgage every year, the mortgage term will be shortened by four and a half years. All the interest that would have to be paid for that part of the loan is saved and will add up to more than $40,000.
5. Switch to bi-weekly payments – Make two half payments within the month. This is a great option for those who are paid bi-weekly. Twenty-six payments will be made in the calendar year which means that thirteen full payments are made instead of twelve. This method will reduce the mortgage term by six years on a 30-year mortgage. Progress is made, but the extra payments are spread throughout the year to make budgeting easier.
6. Treat a 30-year like a 15-year – If the current mortgage has a 30-year term, calculate the 15-year payment schedule and pay accordingly. The additional funds will be applied directly to the principal and will reduce the term of the loan by half. This method is beneficial when unexpected expenses require a reduction in the mortgage payment for one month. Since the 30-year payment is actually due, a lower payment can be made without paying any penalty. The higher payment can be made in subsequent months.
7. Apply tax refund to mortgage – Whenever a tax return is received for overpayment of income taxes, apply the entire refund to the outstanding principal amount on the mortgage. Readjust withholdings for the next year and apply the amount saved each month.
8. Sell an asset and apply the funds – Unused assets are a source of funds that can be applied to an outstanding mortgage. A boat that sits on its trailer can be sold, and the funds used to pay down the mortgage balance. Consider the goal of living a debt free lifestyle when considering which assets can be sold to contribute to the project.
Many mortgage calculators exist to aid in creating an accelerated repayment plan. If emergencies arise, simply reinstate the plan when other obligations allow. When the mortgage is paid off, set another large goal to work for or reward the entire family with a once-in-a-lifetime vacation.