Being mortgage-free is a dream for many home owners. Like any other debt, the sooner you pay off your mortgage, the better off you’ll be and the more money you'll save in interest costs. Here are some suggestions as to how to do this:
Mortgage companies generally establish payments based on set amortization periods (such as 25 years). You can request payments higher than that amount, if your budget warrants it. Any additional amount will be applied directly to the principal and reduce the length of the mortgage and interest paid.
Switching from a monthly payment to a bi-weekly or weekly payment increases the number of payments per year. If your monthly payment is $1,500 and you choose a bi-weekly payment of $750, you’ll be making 26 payments of $750 ($19,500) rather than 12 payments of $1,500 ($18,000). The extra payments will be applied to your principal and save you interest over the course of the mortgage.
Use part of any pay raises to increase your mortgage payments. The increase is applied directly to your principal. Some institutions allow you to do this whenever you want. Other institutions only allow additional payments on specific dates or at certain times of the year.
For example, if you were to increase your bi-weekly payment on a $100,000 mortgage by $25, at an annual interest rate of 4.5% you would reduce the amortization from 25 years to 21 years and save $11,151 in interest.
Have your mortgage payments come out of your bank account when your pay is deposited to reduce any budgeting confusion. You won't need to keep track of how much money should be in the account to cover future mortgage payments.
If your mortgage renewal interest rate goes down, keep the payments at the higher level, as you are used to those payments anyway. Doing so helps to eliminate your debt faster.
Some institutions allow you to pay an additional 10 to 15% of the original principal each year. Try to make an extra mortgage payment every year, which is a good use of a tax refund or other windfall. Making extra payments, of course, eliminates your debt quicker, which is especially true in the early years when most of your payments are interest. Any additional money comes off the principal, resulting in significant savings. At the end of your mortgage amortization, the payment is mostly principal and very little interest. Therefore, extra payments at this time won’t result in much savings.
When you renew your mortgage, consider reducing your amortization period from the standard 25 years to 20 or even 15 years. With some increase in monthly payments, you can greatly reduce the amount of interest you pay over the life of the mortgage.