Manageable Ways To Pay Down Your Mortgage
Pay down your mortgage manageably
You don’t need to go to extreme lengths to pay down your mortgage quickly.
And while it may seem impossible, there are painless ways to pay down your mortgage that won't leave you feeling financially overwhelmed.
In fact, putting a dent in your mortgage doesn’t mean you have to live like a pauper or grind away working overtime. Instead, here are four easy and manageable tips for paying down your mortgage.
Tip #1: For the Most Savings, Make Extra Payments in January
Making extra payments is a tried and true method of paying down your mortgage, but you may not know that there's a certain time of year that gives you the most bang for your buck. And even just one extra payment a year could make a big difference in paying down your mortgage.
"If you are determined to pay down on a mortgage, make an extra payment at the beginning of the year," says Jae Wu, a real estate and mortgage specialist at the real estate company, Heyler. Wu explains that the earlier you pay down in the year, the less interest you accumulate throughout the year.
For example, a $500,000 mortgage with an interest rate of 4.53 percent (the rate as of January 2, 2014 as reported by Freddie Mac), would have a monthly payment of $2,542. By making an extra payment of the same amount at the beginning of the year, you will shorten the loan payoff from 30 years to 26 years.
While four years may not seem like a huge difference, that time translates into big savings. By paying off this home loan four years early, you would save $67,582 in interest.
But where can you find the extra cash each year?
If you receive a year-end bonus, you could contribute that to your extra payment in the beginning of the next year. Another option that coincides with the holiday season is selling any unwanted gifts on Ebay. Or if you go out of town for the holidays, consider renting out your home on a site like Airbnb.com.
No matter how you make that extra payment, it will help you put a dent in your interest and ultimately your mortgage.
Tip #2: Find Out Whether You Can Lower Your Interest Rate by Refinancing
According to Freddie Mac's 2013 Third Quarter Refinance Report, homeowners who refinanced their home loan during the third quarter of 2013 were able to reduce their interest rate by an average of 1.8 percentage points. That's a savings of about 30 percent for individual homeowners.
To see if you could reap similar benefits, it's a good idea to consult your mortgage lender about refinancing. And that's exactly what Lynn Truong did.
After eight years of owning her first home, Truong, the editor-in-chief of the personal finance blog Wisebread, was prompted to speak to her lender when she decided to buy a new home. To help her qualify for another home, her agent suggested that she refinance her first mortgage, a 30- year fixed rate. Once she did, her mortgage rate fell from 7 percent to 3.5 percent, even though she kept the same loan term of 30 years.
According to Truong, her monthly mortgage payments were 40 percent less after refinancing. Refinancing not only lowered her monthly payments, but also lowered her debt-to-income ratio, which helped Truong look financially stable and less of a liability when purchasing her second home.