The Honest Broker: Strategies to pay off your mortgage early
BY DIANE LOTT, BROKER PARADISE FOUND REALTY
Last week we discussed the pros and cons for early prepayment of a mortgage. This week we will discuss different strategies to make it happen.
1. Make extra payments
There are two ways you can make extra mortgage payments to accelerate the payoff process, either by Biweekly mortgage payments or making an additional monthly payment.
The first way is to split your monthly mortgage payment in half and make biweekly payments instead. By doing this, you’ll end up making the equivalent of 13 months of mortgage payments in one year, instead of 12, and saving a bundle in interest. This tactic might be easy for some homeowners because it’s barely noticeable in the monthly budget. It is recommended that you consult with your lender or servicer first to confirm whether it accepts biweekly payments (most do). If not, it’s up to you to set aside those biweekly payments and lump them into a single payment each month. The benefit of the extra annual payment is still there, but without the convenience of the lender allowing you to schedule payments every two weeks.
The second approach is to pay extra against the principal each month or make an extra principal-only payment annually. It can also save you tens of thousands of dollars in interest over the life of the loan.
Example: Let’s say your 30-year mortgage is for $250,000 and your interest rate is 4 percent. If you make an additional $100 monthly payment to the principal balance of your loan, you’ll shave off four years and $27,957 in cumulative interest payments from your mortgage.
This can be a better tactic than refinancing, as it doesn’t lock you into a payment. If for some reason you can’t add more to your monthly mortgage payment, you won’t be penalized. If you go this route, make sure to check with your lender that the payments will be applied in the correct way to reduce the principal, not prepay the interest. You’ll also want to make sure the lender understands the extra payment is not for the next month’s mortgage payment.
2. Refinance your mortgage
Refinancing your mortgage to pay it off early only makes sense if you can get a lower interest rate or shorten the loan term. There are costs associated with refinancing, so be sure the savings outweigh those costs. Refinancing into a shorter-term loan, such as switching from a 30-year mortgage to a 15-year mortgage, can also help bring down your interest rate while putting you on the path to early payoff. However, with a shorter term, your monthly payment will be higher, which could stretch your budget too thin.
3. Recast your mortgage
Mortgage recasting is different from refinancing because you keep your existing loan, pay a lump sum toward the principal and your lender then adjusts your amortization schedule to reflect the new balance. This will result in a lower monthly payment, but your loan term and interest rate will stay the same. One major benefit to recasting is that the fees are significantly lower than refinancing. Usually, mortgage recasting fees are between $200 and $300 (contact your lender to request the service and confirm the costs). Plus, if you have a low interest rate, you get to keep it. On the flip side, if you have a high interest rate, refinancing might be a better option.
4. Make lump-sum payments toward your principal
An alternative to recasting is to make lump-sum payments to your principal any time you get a financial windfall or unexpected influx of cash. This could be a bonus at work, tax refund, inheritance or funds earned from the sale of valuables. Unfortunately, VA and FHA loans can’t be recast. Therefore, lump-sum payments might be the next best thing for borrowers with these types of loans, and you’ll save yourself the lender’s fee for recasting. With some mortgage servicers, you must specify that excess payments are to be put toward the principal. Check with your servicer if you are unsure how lump-sum payments will be applied.
Be Well!
Diane
Diane Lott, Broker
Owner: Paradise Found Realty
Paradise Found Realty, Inc. of Palm City
website: www.ParadiseFoundRealtyFl.com
Email: diane@paradisefoundrealtyfl.com
Phone: 954-294-5060
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