For most people, a mortgage is the largest debt they must pay monthly, In addition, mortgages are usually the most long-term debt a consumer has. While there are tax benefits to having a home mortgage, some prefer to be able to pay these loans off in a shorter period of time than the standard 30-year mortgage. While it may seem overwhelming, there are some methods that may be used to pay a mortgage faster.
Consider refinancing
During 2012 and continuing in 2013, average mortgage interest rates are very low. In many cases, mortgage rates are below four percent. For a homeowner who has 25 or more years left to pay on a 30 year mortgage, refinancing their loan and taking a 15 year mortgage can mean a considerable savings in time and interest payments. Before considering refinancing a home, it is important to evaluate fees, if the new mortgage will result in higher payments and what the closing costs of the loan will be.
Extra payments can help
For a homeowner with a 30 year mortgage, it may be possible to make additional payments on their mortgage on a monthly basis. For example, a homeowner who has a monthly mortgage payment of $1,000 each month may elect to make a payment of $250 each week for the life of the loan. In this case, 52 weekly payments would total $13,000 versus $12,000 if monthly payments were made. This may reduce mortgage length by as many as six years.
Principal reduction
Another easy method for reducing the term of a mortgage is through principal reduction. Extra payments monthly will reduce the term of a loan but, one time lump-sum payments accomplish the same thing. Homeowners who win the lottery, get an inheritance or get an annual bonus may consider sending a lump-sum payment to their lender. Many lenders will require the borrower to specify this amount is to be used to reduce the principal amount of the loan. In this case, provided the borrower continues to make the same monthly payment after a principal reduction, the loan will be paid off faster than if no lump sum payment was made.
Most people understand that an investment in a home is a long-term obligation. However, there are several methods of reducing the overall term of the loan. Before a homeowner makes any additional payments or refinances their loan to reduce the loan term, it is important to review loan documents and make sure there is no prepayment penalty.