2 Methods To Repay Your Mortgage Faster: Which Should You Choose?
If you currently have a mortgage and would like to repay it faster than what you are scheduled to, you have options. Paying off a mortgage early is a great way to become debt-free faster, and it will help you save a lot of money in interest. There are many ways to do this, but here are two different methods you could consider that will help you repay your mortgage in less time.
Pay Extra Each Month
The first way to repay a mortgage faster is to keep your current mortgage and simply pay extra on it each month. Every mortgage payment you make goes towards principle and interest. At first, the majority of your payments will go towards interest, which means you will pay very little towards the actual principle amount of the loan. As the loan progresses, this will switch though, and your payments will eventually go more towards the principle.
Because this causes your principle balance to go down faster, you will be able to pay off your loan before it would have been paid off with only making the actual payments.
For example, if you pay one extra mortgage payment per year, you could wipe out six years of payments off your loan. In other words, if you start making an extra payment right away, you could reduce a 30 year loan to 24 years.
Refinance With A Shorter Term
If you do not think you can pay extra on the loan each month, you might be able to use the second method for reducing the length of your mortgage. This method will involve refinancing your loan, and this option can work well if you can get a significantly lower interest rate.
One thing to keep in mind with paying extra on your current mortgage is that there will not be any fees involved. You can begin using that method as soon as you'd like, and you are free to stop whenever you choose. If you choose to refinance your loan, on the other hand, you will have fees.
Banks charge loan fees whenever they make new loans, and the fees involved with refinancing are usually around 3% to 6% of the principle balance of the loan.
For example, if your current loan balance is $150,000, it may cost $4,500 to $9,000 just to refinance. This is extra money you will have to either pay up front or add to the balance of your loan. Because you cannot get around this fee, you will automatically have more money to repay, which could hinder the process of repaying your loan early.
You may be able to understand this with an example. If you have a 30 year loan for $150,000 at 4.5% interest, your payments would be around $760 per month for 360 months. If you refinance and it costs $9,000, you would have to get a loan for $159,000. If you refinanced for 20 years at 3.5% interest, your payments would be $922 for 240 months.
With this example, you would technically be paying over two extra mortgage payments per year; however, you would be able to repay the loan in 20 years versus 24 years if you kept your original mortgage and paid one extra payment per year.
Both of these options are good to use for repaying a home mortgage faster, but it is wise to thoroughly evaluate each before choosing one. You can talk to your lender if you decide to refinance, but you may run want to compare the differences with both methods before deciding which option is right for your current situation.
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