Many borrowers may never come across the idea of whether or not they’ll ever pay off their mortgage in full while remaining in their home, because the practice has become less common. According to a Harvard’s Joint Center for Housing Studies survey, 63% Americans ages 55 to 64 still have mortgages. Regardless, actually owning your own home is still part of the growing American Dream, and there are ways to do it.
Refinancing as a way to lower your mortgage rates is a great way to shorten the life of your loan because of the significant amount that you save by doing so. If you have a mortgage interest rate of 6% or even above, you can refinance today for as little as 4% depending on your mortgage type. This savings accelerator could end up being the way that you ultimately pay off your mortgage and truly own your home.
2. Doubling the principle payments
Although this may be an option which could help to supplement the principle payments that are not being made, you may want to check with your mortgage lender before you decide to do so. Some mortgage contracts include a fee for prepayments, which is why it is vital to verify if there is such a clause.
If this option is in fact in your cards, the rewards of doing so can be great. Take for example a $200,000 loan that has a total mortgage payment of $1,336. Only $219 of that goes to reducing the loans balance. By taking that amount and adding it to your payment (equaling up to a $1,554 payment) you’ll be able to cut off huge sums of time that your loan still exists.
Some financial advisors advice for borrowers to create savings and investment accounts devoted to paying off their loan, because using upfront cash decreases their reserves they may suddenly need later on. Paying off a mortgage early can be important, however financial hardships do come up and a lot of homeowners end up having to refinance down the line if given the chance. Investing money in special accounts instead of sending the payments directly to your lender could potentially equal you big savings, and still allow you to spend more money on your loan.
4. Refinance for a shorter loan term
Instead of messing with investments, calculating extra principal payments each month, or having to discipline yourself to direct savings from a refinance, just refinance to a different mortgage type. Although refinancing from a 30-year fixed rate mortgage to a 15-year FRM shortens the loan term and lowers the interest, monthly payments are going to supplement the difference. If you have the money and want to get out of debt on your home at a faster pace, this option may be the one for you.
5. Systematic principal reduction
A final way to put a mortgage into an early retirement is to set up a payment plan where you are paying larger payments each month and dividing the payments to be made every two weeks. This advice may make the most sense to borrowers who get paid every two weeks, because the bi-weekly method will work to allow them to set up automatic transfers that are made on payday. An example would be a $15,000 savings plan over the course of 26.3 years on a $200,000 mortgage with a 3.5% interest rate.