Becoming debt free is everyone’s dream, but it becomes increasingly more difficult with everything costing more these days including the price of real estate. When it comes to your home, making some additional payments towards your mortgage can be a smart idea as it can save you thousands over the length of the loan while also shaving years off of the whole loan term. It is most often suggested that you do this on your own terms rather than enrolling in an accelerated payment plan as those programs can oftentimes cost hundreds of dollars. Here are three ways to pay down your mortgage earlier than anticipated.
1. Make one extra annual mortgage payment
This can be easier if you get an annual bonus, holiday bonus or get a sizable tax refund. Take this money and apply it to the next mortgage payment towards the principal. This will then help cut down the principal so you will be ahead of schedule.
2. Increase your monthly payment by one twelfth
The additional money that you are paying towards your balance is applied to the principal and the principal is the actual amount that you owe without interest. The majority of the payments that you make earlier on in the mortgage term are primarily interest so paying down the principal will save you a lot in the years ahead. Paying an additional 1/12th for some will be easier to afford in terms of your regular cash flow.
3. Pay half of your monthly payment every two weeks
Some mortgage institutions will allow you to do at no extra cost while some others will require that you enroll in a formal plan for a charge. Alternatively you can self manage this within your own bank accounts. Try transferring these payments from checking to savings accounts and then the total amount to your mortgage lender when payment is due.
How this works is that by the end of the year you will have made 26 half payments which equates to 13 full payments or 1 extra per year. As an example of the potential savings, a $200,000 30-year loan with one extra payment per year will shorten it to 26 years with a savings of over $32,000 in interest.