As a homeowner, paying off your mortgage loan sooner is a great way to free yourself from debt and minimize the overall interest on your loan. This article will detail some useful strategies and help you determine which approach will work best for your specific situation.
Paying Off Mortgage Loan Sooner – 5 Practical Ways
Here are five possible ways to pay off a mortgage loan sooner:
1. Making Extra Payments
One of the more effective methods to pay back your mortgage loan sooner is to make extra payments each month. If you increase the monthly payment (even with a small amount), you can reduce the principal amount and the total interest on your loan.
2. Refinancing to Short-Term
Another effective way to shorten the time to pay off your mortgage is by refinancing it to a shorter time period. If you turn a 30-year loan into a 15-year mortgage, you can significantly reduce the interest amount that needs to be paid over the loan.
That said, keep in mind that shorter-term loans come with greater monthly payments. So, before making this decision, compare mortgage loans to see if the higher payment fits your budget.
3. Making Lump-Sum Payments
Making a lump-sum payment towards the principal is another strategy to pay off your mortgage loan sooner. If you receive a bonus, tax refund, or any other windfall, consider putting that money towards your mortgage loan principal. By doing so, you can reduce the total interest amount.
4. Splitting Monthly Payments
Splitting your monthly payment in half and sending it every two weeks is another effective way to pay off your mortgage loan quickly. This strategy results in 26 half-payments each year, equivalent to 13 total payments annually. By doing so, you can pay off the loan years ahead of schedule.
5. Making One Extra Payment per Year
Making one extra payment per year is another simple strategy to pay off your mortgage loan sooner. You can reduce the principal balance and the overall interest amount.
Paying Mortgage Loan Early – Potential Advantages
Paying off your mortgage loan sooner can have several benefits, including:
- Saving money on interest – By paying off your mortgage loan early, you can save a lot on interest payments.
- Reducing your financial stress – Being debt-free can provide mental peace and minimize the financial stress. This can be significantly worthwhile during times of economic uncertainty or job loss.
- Increasing your net worth – Paying off your mortgage loan earlier can increase your net worth by reducing your liabilities and freeing up funds to invest in other assets.
- Improving your credit score – If you cover your mortgage loan sooner, it can reduce the debt-to-income ratio, improving your credit score.
Paying Mortgage Loan Early – Potential Disadvantages
While paying off your mortgage loan earlier can have several benefits, there are also potential disadvantages to consider. These include:
- Limited liquidity – Paying off your mortgage loan early can tie up a significant portion of your savings, making it more difficult to access those funds in case of an emergency.
- Missing out on other investment opportunities – If you are using extra funds to pay off your mortgage loan early, you may miss out on other investment opportunities that could provide a higher return on investment.
- Higher tax bill – Paying off your mortgage loan earlier can result in a higher tax bill because you will no longer be able to deduct the interest payments on your mortgage from your taxable income.
- Early repayment penalty – Some mortgage loans come with an early repayment penalty, a fee charged by the lender for paying off the loan early. Before making any extra payments, make sure to read your mortgage contract and understand the terms and conditions.
Conclusion
Accelerating your mortgage loan repayment is a highly effective approach to minimizing your debt and boosting your savings.With the help of the above-mentioned ways, you can pay off your mortgage loan years ahead of schedule. Each strategy has its benefits and drawbacks, so it is essential to consider your specific financial situation and goals before deciding which strategy to use.
