Pay Your Mortgage EarlyPaying off your mortgage early can ease your mind from worries of foreclosure or increasing mortgage rates. Increasing numbers of people are doing this, and relaxing in the knowledge they not only have no mortgage, but also own the entire equity in their home. It’s something to think about, but can you pay yours early?

Most people are unable to make a cash payment to clear their debt. However, there are steps they can take to reduce the time they will take to clear off their mortgage loan. Here are some ways of paying your mortgage early without actually paying off your loan balance in cash

Paying Your Mortgage Early: Pay More Principal

If you increase your monthly payment you can make sure the extra comes off the principal you owe. The way amortization works is that even if you make a single lump sum payment, each normal monthly payment you make after that will be paying less to the interest and more to the principal.

If you can’t afford a lump sum, then add something to your monthly payment. If you are paying $575/month, increase that to $580 or even $600. Your mortgage will then be paid off several months or more early. Obviously, the more you pay extra, the faster your mortgage will be cleared. However, even if you just pay these extra sums now and again, it will still make a big difference.

Switch to Biweekly Payments

Biweekly payments are a popular way of clearing your mortgage early. There are 12 months and 52 weeks in each year. 26 biweekly payments come to 13 monthly payments each year, and not just 12. Your lender will take your biweekly payments, and apply them at the end of each month. You will be paying slightly more each month, amounting to a full month by the end of a year. By the simple task of making this extra payment each year, you can reduce your repayment period for a 30-year mortgage by as much as 6 years!

Your bank or lender should be able to accommodate you with that. Some will accede to your request free of charge while others will charge you a fee. You should make sure that your bank applies the extra payment to your principal. As the principal reduces faster, so your interest reduces faster than normal each month. Even more of your regular payments then go towards the principal.

Refinancing to a Lower Term

If you are now earning more than when you set your mortgage up, you may be able to refinance it. By refinancing a 30-year mortgage to 15 or 20 years you will be making higher payments but you will also be clearing your mortgage early.

An even better way is to arrange your mortgage over 30 years, but repay it as if it were over 15 or 20 years. Alternatively start paying more as you earn more. Pay 50% of your increase to your mortgage and spend the rest. The only time this doesn’t work is if your mortgage interest rate is significantly less than you could earn by investing the cash. Don’t forget that by reducing the principal you are also reducing your interest payments into the future. A direct comparison of mortgage and investment interest rates is therefore not valid.

Clearing your mortgage early is a good way to increase your equity at a faster than normal rate. It is also a good way to invest your spare cash. The less you owe on your mortgage, the less interest you are paying, so the more goes into paying off the principal – you gain all ways.  It is also good to clear your mortgage before your retirement, and these steps could ensure that. However, take good financial advice before committing yourself. A mortgage adviser can offer advice tailored to your personal circumstances.

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