Strategies To Reduce Your Mortgage Quickly And Efficiently

There are various ways to reduce your mortgage quickly. One way is to make additional payments as part of your scheduled amortization. You can also pay 1/12 extra each month, which will amount to an extra payment by the end of the year. Another way is to make a one-time payment, for example, if you receive a tax refund. If you can't afford your mortgage payments due to a major life event, you may qualify for a loan modification, which changes the terms of your loan to help avoid foreclosure. It's also important to balance your financial priorities before deciding to pay off your mortgage early.

Make extra payments

Making extra payments is a great way to reduce your mortgage quickly. This strategy can help reduce the amount of interest you pay over time, but it's important to consider your full financial picture, including emergency savings, retirement funds, and other loans. Here are some tips to make extra payments and reduce your mortgage quickly:

Inform your lender:

It is important to inform your lender that your extra payments should be applied to the principal amount and not the interest. By doing so, you ensure that your extra payments have a meaningful impact on reducing your loan term and overall interest.

Make a one-time payment:

If you receive a windfall, such as a tax refund or bonus, consider making a one-time lump-sum payment towards your mortgage. This can significantly reduce your principal balance, resulting in lower interest charges over time.

Pay extra each month:

A budget-friendly way to make extra payments is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you'll have made the equivalent of an extra payment by the end of the year. This strategy is feasible if your income increases slightly but consistently over time.

Round up your payments:

When budgeting for your mortgage payment, consider rounding up to the next highest $100 amount. For example, pay $800 instead of $743 or $900 instead of $860. This strategy can help reduce the term of your mortgage significantly.

Recasting your mortgage:

Making a large lump-sum payment towards your balance allows your lender to re-amortize the loan. With a smaller balance, you'll owe less in interest and pay less each month. Recasting may involve an administrative fee, but it can be a powerful way to reduce your monthly payments.

Recast your mortgage

Recasting a mortgage is a feature of some mortgages that allows you to pay a large lump sum towards your principal loan balance. The remaining principal and interest payments are then recalculated based on a new amortization schedule. This reduces your monthly payments without lowering your interest rate or shortening the loan term.

Mortgage recasting is best for homeowners who want to keep their current interest rate and have the cash to make a substantial lump-sum payment. It is a more comfortable option than refinancing, which involves replacing your current mortgage with a new mortgage loan, potentially at a lower interest rate, and can be costly and dependent on your credit standing. Recasting, on the other hand, does not involve a credit check and continues with the original mortgage.

To be eligible for mortgage recasting, you must have a conventional mortgage, as government-backed loans such as FHA, VA, or USDA loans do not qualify. Additionally, your lender may require you to be in good standing with payments and reduce your balance by a minimum amount, typically $10,000, to approve the recasting.

While mortgage recasting can help you reduce your monthly payments, it is important to note that it will not lower your interest rate or shorten the loan term. If these are your goals, refinancing may be a better option.

Reduce private mortgage insurance

Private mortgage insurance (PMI) is a surcharge that adds to your monthly mortgage payment. It is usually required if you have a conventional mortgage and made a down payment of less than 20%. It typically costs between 0.1% to 2% of your loan amount per year, or between 0.5% and 5% of the total loan amount annually.

There are several ways to reduce or eliminate PMI:

• Refinancing: You can refinance your mortgage to a conventional loan and build at least 20% equity. This option may be costly and may not be feasible for everyone.
• Request cancellation: You can request your lender to cancel PMI when your mortgage principal is scheduled to fall to 80% of your home's original value, i.e., when you've earned 20% equity. Lenders are legally required to grant this request as long as you are current on your monthly payments.
• Automatic cancellation: Federal law requires lenders to automatically cancel PMI when the balance of the mortgage drops to 78% of the home's purchase price or when the loan term reaches its halfway point, whichever comes first.
• Pay down your mortgage faster: You can make additional payments to reduce the principal balance of your mortgage to 80% of the original value of your home. This will allow you to cancel PMI ahead of schedule.
• Recasting: You can make a large lump-sum payment toward your balance, reducing the amount of interest you owe and lowering your monthly payments. However, not all lenders offer this option, and there may be administrative fees involved.
• Split-premium PMI: This option involves making part of your mortgage insurance payment upfront at closing, which lowers the amount charged monthly for PMI.
• Single-premium PMI: This option involves paying a lump sum for PMI at closing, allowing you to avoid monthly PMI fees and keep the lowest rate possible.

Loan modification

There are different types of loan modifications available, depending on the type of loan you have. For example, if you have a conventional mortgage backed by Fannie Mae or Freddie Mac, you might be eligible for the Flex Modification program, which can reduce your monthly payments by up to 20%, extend the loan term up to 40 years, and potentially lower the interest rate. On the other hand, if you have a VA loan, you might be able to roll missed payments back into the loan balance and work with your lender to come up with a new, more manageable repayment schedule.

To apply for a loan modification, you'll need to contact your mortgage servicer and provide documentation that verifies your financial situation. This can include bank statements, financial statements, and a letter explaining the circumstances of your hardship. It's important to keep a careful record of the representatives you interact with and get everything in writing.

Overall, loan modification can be a helpful tool for homeowners struggling to make their mortgage payments, but it's important to carefully consider the potential benefits and drawbacks before proceeding.

Focus on your budget

If you're looking to reduce your mortgage quickly, it's important to focus on your budget and make adjustments where possible. Here are some strategies to consider:

Track your spending and create a budget plan:

Start by analysing your monthly expenses and identifying areas where you can cut back. Fixed expenses, such as groceries, transportation, and utilities, are essential, but discretionary spending on entertainment, dining out, or non-essential items can be reduced. Consider using budgeting tools or apps to help you track and manage your spending.

Increase your income:

Look for opportunities to bring in more money, such as taking on a side hustle or freelance work, selling unwanted items, or asking for a raise or promotion at your current job. Increasing your income will give you more financial flexibility to put towards your mortgage.

Refinance your mortgage:

Refinancing involves replacing your current mortgage with a new one that has more favourable terms. You can opt for a lower interest rate, a longer loan term, or both, which can significantly reduce your monthly payments. However, consider the closing costs and fees associated with refinancing to ensure the savings justify the switch.

Make extra payments:

If your lender allows penalty-free early payments, consider making additional payments towards your mortgage principal. This can be done by rounding up your monthly payments to the nearest $100 or by paying 1/12 extra each month. You can also send any unexpected windfalls, such as bonuses or tax returns, directly to your mortgage company to reduce the principal balance.

Recast your mortgage:

Another option is to make a large lump-sum payment towards your mortgage balance, after which your lender will re-amortize the loan. With a smaller balance, you'll pay less in interest and reduce your monthly payments. Keep in mind that not all lenders offer recasting, and you'll need to have enough home equity to qualify.

Modify your loan:

If you're struggling to make your mortgage payments due to financial difficulties, you may qualify for a loan modification. This involves permanently changing the terms of your loan to make it more manageable, such as lowering the interest rate, extending the repayment period, or reducing the principal balance. Contact your lender or a HUD-approved housing counselling agency to discuss your options.

Remember, the key to successfully reducing your mortgage quickly is to focus on your budget, make adjustments where possible, and seek professional advice when needed.

Frequently asked questions