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Paying off a mortgage used to be a common goal of many homeowners.
Paying off a mortgage used to be a common goal of many homeowners. In fact, mortgage-burning parties were popular in the last century. They were a cause for great celebration-the ending of huge monthly mortgage debt while gaining a sense of peace that comes with getting rid of debt. But flash forward to today, and you're more likely to hear about someone being foreclosed on by the bank than you are to hear about people paying off their mortgage.
But with that said, paying off your mortgage is a great thing if you can do it. We've asked several mortgage experts how to pay off a mortgage. And we have some real success stories to share.
When you make an offer to buy a home, you're probably thinking only of the list price of the home. But you really should know about how much interest you're likely to pay. "Many people assume they will always have a house payment and don't realize how much interest they are paying on the loan," says Danny Kofke, a Georgia personal finance author. He gives this example of a typical transaction:
Price of home: $150,000
Down payment: $30,000
Type of loan: 30-year fixed-rate
Interest rate: 5%
Monthly payment: $644
And here's the true cost:
Paying $644 a month adds up to $7,728 each year.
Multiply $7,728 by 30 years, and you get $231,840.
Add your $30,000 down payment.
When all's said and done, you'll end up paying $261,840 for a house that cost $150,000.
The solution to pay less interest is to pay off your mortgage faster than 30 years. "You can promise yourself that you will pay extra each month towards this loan," says Kofke. But, "Most of us make promises we cannot keep. We might have the best intentions to pay extra each month, but then something comes up-and we find that we need this 'extra' money."
You could sign up for biweekly payments instead of monthly payments, which means that you make one extra payment each year. How? "Let's say your monthly payment is $1,000," says Kofke. "You would pay $12,000 each year towards your mortgage ($1,000 x 12 = $12,000). If you used the biweekly approach, you'll pay $13,000 by paying $500 every two weeks. This adds up to 26 payments ($500 x 26 = $13,000). This can trim anywhere from five to seven years off your 30-year loan, depending on your interest rate." Just make sure your mortgage company doesn't charge a fee for this.
And here's a method Kofke likes and did himself: He refinanced his loan.
"My family moved from Florida to Georgia in the summer of 2006. We ended up going with a 30-year loan. When the interest rates dropped to record lows in 2013, we refinanced. We were able to lower our rate by three full points and reduced our term to 10 years. We pay around $275 more each month compared with our original loan but will own our house free and clear much earlier, and we will save almost $75,000!"
If you do pay more each month, ask your lender the effect it will have. "The lender can let you know that you will pay off the loan in X amount of time and the interest savings will be X amount of dollars," says Josh Moffitt , president of Silverton Mortgage Specialists, Inc.
Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage , says, "The only way to pay a mortgage down faster is to make extra payments one way or another. There is no 'One Weird Trick.'"
Fleming discusses three ways to accomplish this:
A) Make biweekly payments
B) Pay extra once a month
C) Apply a lump sum
Fleming has a favorite. Can you guess which one?
If you answered "C," you would be correct. Here's why.
"Biweekly payments and paying extra each month have almost exactly the same results," he says. If you want to figure this out, Fleming says, "To calculate the amount you need to pay extra each month to get the same results as biweekly, simply multiply the biweekly payment by 26, and then divide by 12. This is the amount on average you are proposing to pay each month, so pay that much each month in one payment."
Either works for paying your mortgage down faster. But applying lump sums works faster in most cases.
"By far the faster way to pay off your mortgage, and the one that saves you the most money, is to apply windfall income to the mortgage whenever you have it (bonuses, restricted stock units, inheritance, etc.)," says Fleming.
If you do apply a lump sum, Moffitt says, "Check with your servicer to see if the loan is eligible for recasting. For example, if you make a $20,000 lump sum payment, and the servicer recasts the loan, your monthly payment would decrease based on your interest rate and remaining principal." Although you don't have to decrease your payments if your lender will recast the loan, it's nice to have that option "in case circumstances change in the future, such as job loss or some emergency," says Moffitt.
One method that works well for people is to have a goal to pay off the mortgage by the time a certain life event will happen, such as retirement or a child's high school graduation. "The lender can run the numbers to determine how much per month you will need to pay," says Moffitt.
Moffitt also recommends that homeowners speak with a tax professional or a financial planner to help come up with a plan. "It's important to ask how paying your mortgage off early will fit into your tax planning and personal planning," he says. "For example, if you pay off your mortgage in full without talking to a CPA, you might not think about losing the deduction on interest when you file taxes next year."
If you really want to pay your mortgage early, don't move. "Every time you sell and the brokers take their 4 percent to 6 percent commission, and you have to refurnish a new house and buy blinds for the new custom windows, hire movers, etc., you could easily spend $50,000 to $100,000," says Neil Maxwell, founder and CEO of Maxwell Wealth Planning. There's also the interest to consider, most of which is paid in the beginning of the loan. "It isn't until you get 10 years into a 30-year loan where you start really making headway on the principle of the note."
Matthew King, of Matthew King Software, is almost to the finish line. "I have one year left on my mortgage (purchased 11 years ago with a 30-year loan) and have helped friends and family learn how to effectively pay their mortgage off early." King then developed an iPhone app to help people use his method. Loan Calculator: This app shows how much extra or monthly payments will affect your loan by showing you money and time saved. "It's a huge motivator," he says.
Terrell Dinkins, author of One Bucket at a Time: A Woman's Guide to Creating Wealth, will be mortgage free in three years, right around the same time her son will be graduating from high school, which Dinkins says is perfect timing. "My husband and I originally had a 30-year mortgage," she says. But after six years, this couple refinanced to a 15-year mortgage. But even before the Dinkins'refinanced, they were thoughtful about paying off their mortgage early. They put down a 20 percent down payment, and when they had extra money, they applied it to the mortgage.
If you wish to pay off your mortgage early but don't know where to get the extra money to do so, Brian Betzler, regional sales manager for TD Bank, has a suggestion: "Cut back on unnecessary spending. Packing your lunch for work or ditching the daily coffee can add up and can allow you to put down a few more dollars towards owning your home."
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