4 Ways to Reduce Your Mortgage Time

4 Ways to Reduce Your Mortgage TimeIf you're paying off a mortgage, chances off you don't want to be paying it off any longer than you have to. Of course, the most obvious way to pay off a mortgage more quickly is to get a shorter-term loan (i.e. a 15-year instead of a 30-year). This option may be too expensive for you, however.

So, how does one fix a budget alongside a loan that you can afford while paying it off early? Here are 4 common approaches, recently laid out by Zillow.

1. Refinance and Reinvest Savings

It is a smart move to evaluate your loan when rates drop, and you can shave years off of your mortgage in doing so. However, refinancing doesn't automatically shave years off of your mortgage. In order to do so, it is more beneficial to refinance from a 30-year loan to a 15-year loan at this time.

Say you purchased a home for $300,000 with 10% down around 5 years ago. The rate on your 30-year fixed loan of $270,000 was 4.875% for a monthly payment of $1,429. With today's rates around 3.625% on your remaining balance of $247,494, your new payment would be $1,129 per month, saving you $300 per month.

Is it a big savings? Yes. However, the downfall is that you're resetting your payoff clock from 25 years back to where you started at 30 years. Instead, if you take the extra step of applying the $300 savings you earned from refinancing to your new loan each month, you will end up shaving off 9.5 years of your new mortgage. In essence, this is the same budget for a reduced time frame.

2. Make Biweekly Payments

Making payments at a higher frequency is another way to reduce the amount of time you'll have to pay off a mortgage. This plan means that you will be able to shave off about 4 years off your mortgage by paying half your payment every other week. This is the simplest way to shorten your mortgage without an actual budget increase.

This means you'll be making 26 biweekly payments per year, or 13 monthly mortgage payments per year instead of 12. Typical budgets can handle this shift pretty easily, as you are simply halving your payment and paying each half every other week.

On a $300,000 home purchase with 10% down, a 30-year fixed rate of 3.625% gives you a monthly payment of $1,231 (plus $88 in mortgage insurance). Paying half ($616 every two weeks, you're paying your loan down by an extra $103 every month, saving $26,511 in interest and paying off the loan in 26 years.

3. Increase Your Monthly Payment Amount

While the previous strategy shortens your loan 4 years by paying about $100 extra per month, you may be able to afford a little more.

If paying, say, an extra $200 month on your 30-year fixed loan at 3.625% on your $300,000 home is an option, you would save $42,969 in interest and pay of your loan 6 years and 8 months early.

For $300 extra a month, you'd save $57,122 in interest and pay off your loan 8 years and 11 months early.

For $400 extra a month, you'd save $68,426 in interest and pay off your loan 10 years and 10 months early.

If you are able to go higher than this, you may want to look into seeing if your budget can accommodate a 15-year loan, as these loans are about 0.5 percent lower than 30-year loans.

4. Make One-Time Loan Payments

If you aren't able to commit to any regular increases on your payment but are interested in cutting your time nonetheless, consider making one-time payments when you get extra finances along the way. Bonuses, inheritances, or selling other properties or investments can be a good source of extra cash that you can put towards your mortgage.

For example, putting a $10,000 work bonus on year 3 of your $300,000 home purchase with 10% down would ultimately save you $15,747 in interest and pay off your loan 1 year and 8 months early. 

Have questions? We recommend talking with one of our recommended mortgage lenders. They will be happy to help you with your process, and help find the best solution for your situation.

Real Group Real Estate

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