Owning a home is one of the greatest goals to achieve in one’s lifetime. More interestingly, home loans have helped many people achieve this American dream faster than it would have taken to accumulate sufficient savings to purchase with cash.
However, home prices have been increasing faster than income over the years. This has resulted in the need for higher loan amounts to purchase homes. With the average mortgage term hitting 30 years, repaying your home loan may feel like forever.
For every problem, there is a solution ― these ten(10) tips will help you lower the debt and pay off your mortgage early.
But before you try them, it is essential to note that a mortgage lender may include a prepayment penalty in the loan term.
A mortgage loan prepayment penalty is a fee a mortgage lender charges when you repay all or part of your loan before the agreed loan term ends. The loan comes with interest rates; the more the years, the higher the chance of charging more interest.
Hence, early payment implies the lender will be getting a lower interest in total; therefore, the prepayment penalty is a cushion.
Contact your mortgage lender and ensure you reach an agreement before you start executing plans to pay off your mortgage early.
Another important thing to mention is that while repaying your mortgage, ensure you have enough funds budgeted for your roof inspection and other home maintenance.
Ways to pay off your mortgage early
1. Cancel mortgage insurance premium
Many lenders will mandate borrowers to get Private Mortgage Insurance (PMI) if the down payment is less than 20 percent of the home’s purchase price. The insurance protects the lender in case you stop paying.
It costs between 0.5 to 2.25 percent of the entire mortgage loan annually and is repaid as part of the monthly mortgage payment.
For context, if you purchase a home worth $350,000 with a 1.5% PMI fee, in addition to your mortgage, you will be a PMI fee of $5,250 annually or about $438 each month.
Some lenders automatically remove the PMI once you have 22 percent equity in the home. But you can request it to be removed once you have 20 percent equity in the home.
The PMI fee can then be redirected into repaying your mortgage loan.
2. Lower your housing cost
You can reduce your home maintenance cost and use your savings to repay your mortgage.
Consider reducing your energy bill by using energy-efficient appliances. Always turn off your tap and repair any leaks as soon as possible to reduce the water bill.
For general home maintenance, check those you can DIY and others you can achieve on a budget.
Also, cut your cable and internet costs, especially if you do not usually use them. Cancel any subscription you are not using and take advantage of discount offers whenever available.
Likewise, avoid impromptu purchases. Only buy what you need and not what you want. You need all cash you can squeeze to hasten your mortgage repayment.
If you can save $500 by cutting unnecessary costs and using DIYs for some repairs, that is about $6,000 yearly. This can significantly reduce the number of years to repay your mortgage loan.
3. Earn passive income
Increasing your monthly income can help you increase the extra payment for your home loan.
You can work overtime if your company permits it or take a part-time job for your free hours and days. Rent out unused spaces in your home, and invest in dividend-paying stocks or bonds if your finance permits.
Depending on your skills and career situation, you can leverage online freelance opportunities.
If you are an expert in your field, consider writing a book, consulting for startups, or organizing paid webinars.
Blogging and vlogging are other ways to share your experience and, at the same time, generate passive income.
4. Increase your payment
Split your monthly mortgage payment into two and make biweekly payments. Understand the number of days and weeks in a month varies. Therefore, if you do this, you will end up paying 13-month worth of the loan in a year.
Another method is increasing the principal each month or annually. If your lender agrees, this does not only help you pay off the loan faster; it may also reduce the total interest over the life of the loan.
5. Refinance your mortgage
Refinance your mortgage into a new one with a lower interest rate and better loan term. This can be a good option if you have a bad credit score when you get the first mortgage. Now that your credit score has improved, you may be qualified for a better interest rate.
Invariably, a loan with a lower interest rate can be repaid faster than another with a higher interest rate.
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