Mortgage Payment Strategies: How To Get Ahead

Paying off your mortgage early is a goal for many homeowners, and there are several ways to do this. You can make extra payments, pay a larger sum upfront, or pay more each month. An online mortgage calculator can help you determine how much you can save by paying extra and how much interest you can save over the life of the loan. It's important to keep in mind that paying extra towards your mortgage may mean you have less cash on hand for other financial goals or emergencies. Additionally, mortgage payments are generally due on the first of the month, and lenders usually provide a grace period of up to 15 days to pay without penalty.

Prepaying your mortgage

Before making additional mortgage payments, consider whether your money might be better used elsewhere, such as retirement savings. You should also check whether there are any prepayment charges or penalties. Prepayment charges may apply when you prepay your mortgage balance before the maturity date. Most borrowers are not subject to a prepayment penalty, but it is important to review your closing disclosure to verify that there are no prepayment penalties tied to your loan.

If you have an open mortgage, you can pay off as much of your mortgage at any time without a prepayment charge. Open mortgages usually have higher interest rates than closed mortgages but are more flexible. If rates start to increase, you can easily pay off an open mortgage and switch to a closed one. On the other hand, if you have a closed mortgage, you may not be able to prepay, renegotiate, or refinance before the end of the term without a prepayment charge. However, some closed mortgages have certain prepayment privileges, such as the right to prepay 10% to 20% of the original principal amount each year without a prepayment charge.

There are several strategies you can use to prepay your mortgage. One option is to increase your payment amount up to 100% of the original regular payment at any time over the mortgage term. For example, if you raise your monthly payment from $830 to $1,000, you could save almost $48,000 in interest over the amortization period and pay off your mortgage about eight years sooner. Another strategy is to make your regular mortgage payments more frequently. For instance, if you make accelerated biweekly payments of $415 instead of monthly payments of $830, you could save nearly $27,000 in interest and pay off your mortgage about 4.5 years earlier.

You can also prepay your mortgage by making one extra monthly payment once a year or with a lump-sum payment. For example, if you make a $1,000 lump-sum payment annually, you could save almost $28,350 in interest and pay off your mortgage about four years sooner. Alternatively, you can pay as much as possible at renewal. For instance, if you choose a 5-year fixed-rate term and make a $10,000 lump-sum payment each time your mortgage comes up for renewal, you'll save about $37,481 in interest over your amortization period.

How to pay off your mortgage early

Paying off your mortgage early can be a great financial goal to set for yourself. It can help you save money in the long run by accruing less interest and provide you with financial stability. Here are some strategies you can use to pay off your mortgage early:

Make Extra Payments:

Making extra payments towards the principal balance of your mortgage can help you save money on interest and pay off your loan faster. You can budget extra money each month or make a one-time payment, such as a tax refund, towards the principal. However, it's important to inform your lender that you want these extra payments to be applied to the principal and not the interest.

Refinance Your Mortgage:

If interest rates decline, consider refinancing your mortgage to a lower interest rate or a shorter loan term. This can help you reduce your monthly payments or pay off your loan sooner. Keep in mind that refinancing may come with fees, so be sure to weigh the long-term benefits.

Create a Budget:

Start by creating a monthly budget to understand your income, expenses, and spending habits. Look for areas where you can cut back, such as groceries or eating out, to free up more money that can be put towards your mortgage.

Prioritize Financial Goals:

Before focusing solely on paying off your mortgage early, ensure you have addressed other financial priorities. This includes paying off high-interest debt, such as credit cards or student loans, building an emergency fund, investing for retirement, and saving for other important goals, such as your children's education.

Consider Opportunity Costs:

While paying off your mortgage early can provide peace of mind and reduce interest costs, it's important to consider the opportunity cost. You may miss out on potential investment opportunities that could provide a higher return on your money. Additionally, making extra payments towards your mortgage may reduce your liquidity, so ensure you have sufficient emergency savings.

Remember to review the terms of your mortgage and be aware of any prepayment penalties that your lender may charge for early payoff. By combining these strategies and staying disciplined with your financial plan, you can work towards paying off your mortgage early and achieving greater financial freedom.

How to get rid of mortgage insurance

It is important to understand what Private Mortgage Insurance (PMI) is and how it impacts your monthly mortgage cost before deciding whether to opt for it. PMI is usually required when homebuyers make a down payment of less than 20% of the home's value. It protects the lender if the buyer stops making loan payments since it is riskier for a lender to give a mortgage with a low down payment.

Wait for automatic termination

According to the Homeowners Protection Act of 1998, lenders must automatically cancel PMI when the mortgage's loan-to-value (LTV) ratio reaches 78% of the home's original value or when the loan reaches its midpoint, whichever comes first. For 30-year loans, the midpoint is after 15 years.

Request PMI cancellation

You can request PMI cancellation when your mortgage balance reaches 80% of the property's original value. You will need to pay for a home appraisal to verify the new market value. If your lender is paying for your mortgage insurance, different rules may apply.

Refinance

With rising home values, you may have the equity you need to refinance and avoid paying PMI. If you have an FHA loan, you will need to refinance to eliminate your Mortgage Insurance Premium (MIP).

Pay down your mortgage faster

If you are in a comfortable financial position, consider making additional mortgage payments to accelerate the reduction of your mortgage balance.

How to reduce your monthly payments

There are several ways to reduce your monthly mortgage payments. Here are some strategies to consider:

Refinancing

Refinancing your mortgage involves replacing your current mortgage with a new loan that has different terms. This can be an effective way to lower your interest rate or extend the repayment period, resulting in lower monthly payments. However, refinancing may come with closing costs and other fees, so be sure to use a break-even calculator to determine if the savings outweigh the costs.

Loan Modification

A loan modification is a permanent change to your loan's terms, such as a lower interest rate, an extended repayment period, or a reduction in the principal balance. This option can make your monthly payments more affordable, but it may also result in paying more interest over the life of the loan. Loan modifications are typically only granted in cases of financial hardship and may have stringent eligibility requirements.

Mortgage Recasting

Mortgage recasting allows you to make a lump-sum payment towards the principal balance of your loan. Your lender will then recalculate your monthly payments based on the new balance, resulting in lower monthly payments. This option can help you reduce your total interest paid over the life of the loan.

Homeowners Insurance

If your homeowners insurance is included in your monthly mortgage payment, shopping for a better rate or increasing your deductible could lower your overall monthly payment. Compare quotes from multiple companies and ask about discounts to find a more affordable option.

Property Taxes

If you live in an area with high property taxes, you may be able to lower your property tax bill by contesting your home's value. This can reduce the escrow payment, which typically makes up a significant portion of your monthly mortgage payment.

Extra Payments

Making extra payments towards your principal balance can help you pay off your mortgage faster and reduce the total interest you pay. This strategy works best if your lender does not charge a penalty for early repayment. Be sure to inform your lender that any extra payments should be applied to the principal and not future monthly payments.

It's important to carefully consider your financial situation and seek professional advice before making any decisions regarding your mortgage. These options can provide some relief from high monthly payments, but it's crucial to understand the potential trade-offs and long-term implications for each choice.

How to calculate your remaining loan balance

To calculate your remaining mortgage balance, you will need to know the loan amount, the interest rate on your loan, the length of your loan, and how many months you have already paid. With these factors, you can figure out the amount of principal still owed. It is important to note that the rate at which your mortgage balance falls will not remain constant. In the early years, your payments will primarily consist of interest, and later on, the payments will be mostly principal, creating a natural acceleration towards the end of your loan term.

There are several online mortgage balance calculators that can help you determine your remaining loan balance. These calculators require you to input information such as the original mortgage principal, annual interest rate, term years, and monthly payment. You can then choose one of the options for calculating the number of mortgage payments made. However, these calculators are typically designed for fixed-rate mortgages, where the terms remain constant throughout the loan period.

If you have an adjustable-rate mortgage, where the interest rates are periodically adjusted, you can refer to your mortgage statement, which is typically sent out annually by mortgage companies. These statements will provide details such as the mortgage balance, the number of payments made, and the interest charged. Alternatively, you can contact your mortgage company directly to obtain your current mortgage balance.

Additionally, you can calculate your remaining loan balance manually using a formula. The formula for the remaining balance on a loan can be found on financial websites. This formula considers the future value of the original loan amount and the future value of the annuity, which refers to the series of periodic payments made on the loan. By applying this formula, you can determine your remaining loan balance at a given time, whether in the present or future.

It is worth noting that making additional principal payments can help reduce your remaining loan balance faster. By paying extra towards the principal, you can decrease the amount of interest you have to pay over time. This strategy can be particularly effective if you have the discipline to make regular extra payments. For example, paying an extra $100 per month towards a $100,000, 30-year mortgage can reduce the loan term by an average of nine years.

Frequently asked questions