So, you’re eager to pay off your mortgage early? That’s a great financial goal to set for yourself!
Being completely debt-free and living in a paid-for home not only offers you a great deal of freedom, but it’s also a great way to accumulate wealth because you’ll have a lot more money each month to save for retirement when you eliminate your house payment. In fact, the average millionaire pays off their house in just 10. 2 years. 1.
We’re going to walk through exactly how to pay off your mortgage early so you can achieve your goal and become a debt-free homeowner, but even though you’re set on paying off your mortgage ahead of schedule, you probably have one big question in mind: How do I pay off my mortgage faster?
Imagine the freedom of owning your home outright, without the burden of a monthly mortgage payment. It’s a dream many homeowners share, and it’s achievable with the right strategies. Even with a $300,000 mortgage, you can pay it off in just five years by implementing some smart tactics.
Understanding Mortgage Payments
Before diving into strategies let’s understand how mortgage payments work. Each payment consists of two parts: principal and interest. The principal is the actual amount you borrowed, while the interest is the fee you pay for using the lender’s money.
In the early years of a 30-year fixed-rate mortgage, most of your payment goes towards interest. However, as you progress through the loan term, more of your payment goes towards reducing the principal. To accelerate your payoff, we’ll focus on increasing the principal payments.
Is Early Payoff Right for You?
While paying off your mortgage early offers numerous benefits like reduced interest costs, increased equity, and peace of mind, it’s not always the best option Consider these factors before diving in:
High-Interest Debt: If you have outstanding debts with higher interest rates like credit card debt prioritize paying those off first.
Insufficient Income: Increasing your mortgage payments requires a higher income. Ensure you can comfortably afford the larger payments without neglecting other financial obligations.
Inadequate Savings: Aim for at least 3-6 months of living expenses in savings before accelerating your mortgage payoff.
Strategies for a 5-Year Payoff
Let’s now examine some methods to assist you in paying off your $300,000 mortgage in five years:
1. Increase Monthly Payments: Calculate the extra amount you need to pay each month to reach your 5-year goal. For a $300,000 mortgage paid off in 60 months, you’d need to pay approximately $3,400 per month.
2. Refinance to a Lower Rate: By securing a lower interest rate, you’ll reduce your monthly interest charges, allowing more of your payment to go towards the principal.
3. Recast Your Mortgage: Make a lump sum payment towards the principal and recalculate your monthly payments based on the reduced balance. This lowers your monthly payment, freeing up funds for extra principal payments.
4. Make Biweekly Payments: Instead of monthly payments, make half-payments every two weeks. This results in 13 full monthly payments per year, accelerating principal reduction.
5. Apply Lump Sums: Make extra principal payments with unforeseen windfalls like tax refunds or bonuses.
6. Reduce Spending and Boost Income: Examine your spending to find areas where you can make savings. Additionally, explore ways to increase your income through side hustles or promotions.
7. Consider a Home Equity Loan: If you have significant equity, consider a home equity loan with a lower interest rate than your mortgage. Use the loan to make a lump sum payment towards your mortgage, then pay off the home equity loan aggressively.
8. Combine Strategies: Don’t be afraid to combine multiple strategies for maximum impact. For example, refinance to a lower rate, make biweekly payments, and apply lump sums whenever possible.
Remember:
- Ensure your loan doesn’t have prepayment penalties.
- Always apply extra payments to the principal balance.
- Consult a financial advisor for personalized guidance.
With these tactics and unwavering dedication, you can accomplish your five-year goal of becoming a full owner of your house. This will enable you to live a more financially secure and satisfying life by freeing up significant funds for other financial objectives.
Make extra room in your budget.
I know you were thinking after reading the last section, “But I don’t have any extra money to put toward my house payments,” but hold on, you probably have more money than you think in your monthly budget.
Now, if you aren’t already making a budget every month, start there. To ensure you are not overspending, write down your income, make a list of your expenses, deduct those costs from your income, and then monitor your monthly spending to make sure you are staying within your budget.
Here are some changes you can make to your budget if you are already living on one, or if this is your first time creating one, to free up funds for an early home payment.
- Lower your grocery budget. Apart from housing, groceries are probably the largest line item on your budget, particularly if you have a family. Consider ways to make savings, such as switching stores, taking advantage of sales, and buying produce that is in season.
- Stop eating out so much. Alright, I’ll admit that since I enjoy eating out, this is difficult for me. However, dining out is almost always more expensive than cooking at home—sometimes significantly more so. Just two or three extra home cooking sessions a week can add up to significant savings over time.
- Do an insurance coverage checkup. It’s possible that an independent insurance agent with access to several providers’ rates will be able to get you a better deal than you’re now paying for your coverage. Speaking with a RamseyTrusted professional can help you get that process started.
- Cancel some subscriptions. It’s very simple to sign up for more subscription services than you really use these days. Determine which streaming services you don’t need, cancel them, and use the money you save for your mortgage.
- Cut back on online shopping. I know, I know . With one-click ordering and two-day shipping, online stores like Amazon are incredibly convenient, but the total cost of all those orders can quickly mount up. Furthermore, if we’re truly honest with ourselves, we probably realize that not everything in our digital cart is necessary. (Gosh darn it!) Saving more money will allow you to pay off your mortgage more quickly each month.
How to Pay Off Your Mortgage Faster: 5 Tips
Before you pay off your mortgage, let’s take a step back and examine some other financial objectives that should be your top priorities. Before you start paying off your house faster, there are four things I want you to do:
- Pay off all of your consumer debt, including student loans, credit card debt, and auto loans.
- Stack an emergency fund three to six months’ worth of regular expenses.
- Begin investing 15% of your income for retirement.
- If you have children, start setting money aside for their college education.
You should concentrate your attention there for the time being if none of those four boxes have been checked. However, if you’ve reached those objectives, you’re prepared to begin making moves toward early home ownership. Exciting!.
Let’s go over five not-so-secret but super helpful tips for making that happen.
How to Pay off a 30 Year Mortgage in 5 Years on a Basic Income
FAQ
What happens if I pay 2 extra mortgage payments a year?
What happens if I pay an extra $500 a month on my mortgage?
How to pay off a $200,000 mortgage in 5 years?
What happens if I pay an extra $2000 a month on my mortgage?
How do I pay off my mortgage in 5 years?
The following are some the most common strategies homeowners use to pay off their mortgage in five years or less. Step One is simply figuring out how much extra to pay each month to hit your goal. There are many free online mortgage calculators that will help you calculate your new payment.
How do I pay off a 150K mortgage in 5 years?
To pay off a $150k mortgage in 5 years, you’d need to contribute an extra $2,025 a month to your regular mortgage payments! How can I pay a 200k mortgage in 5 years?
How often should you make a mortgage payment?
Make biweekly payments – Most homeowners make their mortgage payments on a monthly basis. However, some savvy borrowers pay half of their mortgage payment every two weeks to make an extra payment every year. This bi-weekly mortgage payment accelerates your loan payoff and reduces the overall interest that you’ll pay on your loan.
How do I pay off my mortgage faster?
To pay off your mortgage faster, you’ll need to make extra payments toward the principal—on top of your regular monthly payments. So let’s say you make an extra payment of $200 toward the principal every month. This additional payment helps decrease the principal faster, thus shortening the time it takes to pay off the mortgage.