No one wants to have the burden of a mortgage hanging around for any longer than necessary. You want to take out the loan and repay it off as quickly as possible so that you can enjoy your home in peace. When weighing the options that you have, you will face a decision between a 30-year fixed mortgage versus the shorter 15-year option, which would mean more in terms of monthly contributions but a shorter repayment. Here are some approaches that you can use to reduce your mortgage repayment period while keeping that longer-term mortgage.
Refinance then Reinvest
Interest rates sometimes drop significantly; when they do, it is a good time to consider refinancing your mortgage. To ensure that you have shaved years from your initial plan, implement a 15 year plan from a 30 year one.
If for example you bought a home five years ago for $300,000 whose down payment was10%, the interest rate on a 30-year fixed loan of $270,000 was 4.875%. Your monthly obligation, inclusive of taxes and insurance is $1,429. If you refinance today, the rates are 3.625 percent on the remaining $247,494. Hence your new payment would be $1,129, and you get to save $300 per month. You’re at the same time resetting your loan from 25 years back to 30 years. If you decide to apply the $300 savings toward the new loan per month, you’ll reduce your repayment period by 9.5 years. You will be able to repay your loan within a shorter time without increasing your monthly obligation.
You can make bi-weekly payments to significantly reduce your mortgage repayment period; in some cases this can shave as much as up to 4 years off without increasing your expenditure. This is because they are the same amounts you would have been paying per month but with an increased frequency of the payments. You make 26 payments per year in this method, which translates to 13 monthly payments per year.
If you take a $300,000 home purchase loan with 10% down payment, a 30-year fixed rate of 3.625% equals to payments of $1,231 inclusive of taxes and insurance. If you pay half of it, ($616) every other week, you’re making an extra payment of $103 per month towards your loan. You therefore save $26,511 in interest and shave 4 years off your repayment period.
Increase Your Monthly Payment Amount
If you can afford an extra $200 each month on your 30-year fixed loan at rate of 3.625% on a home loan of $300,000 (with a 10% down payment) you’d save in interest $42,969 and reduce your repayment period by 6.8 years.
Increase that to $300 extra per month and you will reduce your interest by $57,122, paying off your loan earlier by 8.11 years. Now, $400 extra per month would save you $68,426 in interest and reduce your repayment period by 10 years and 10 months.
If you opt to go higher that the $400 per month, you’d want to look at altering your plan to a 15-Year mortgage plan because the interest is 0.5% lower than the 30 year plan and you stand to save a lot more .
Make One-Time Loan Payments when You Receive Extra Cash
You can choose to stick to the 30-year fixed plan but once in a while when you receive a sizable cash influx (such as bonuses from work) make a lump sum payment to offset your loan.