Mortgage is one of the most dreaded words in everyone’s dictionary.
No one wants to be in debt and would like to debt free ASAP and for as long as possible.
There is nothing pleasant about being in debt, especially if you are in a long term debt, you are bound to be calculating the number of years it would take you to be debt free.
When you have a long term mortgage, paying it off early may seem almost impossible.
However, paying it off early will not only make debt free earlier, but will also reduce the interests accrued on your loan, thus reducing your overall debt.
Paying off a mortgage is easier than it seems. Here are a few tips to pay off your mortgage early:
Though parting with a part of your pay check every single month is difficult, you have to focus more on your future debt free life. Instead of paying a fixed amount once a month, make it twice a month. Though it may complicate your financial situation further, it will definitely help you get debt free in half the expected time.
Not only will the debt period reduce, the interest amount to be paid will also decrease. This is because the outstanding loan amount reduces twice as fast and hence lower interest to be paid.
If paying extra on a monthly basis does not work for you, make adhoc payments. Pay more once in a few months or alternate months, etc. This will help reduce your mortgage faster than regular monthly payments. Also, when you have the adhoc payment in mind, you will save more to make the payment.
Though such random payments may not reduce your overall interest rate steadily, it will definitely reduce your outstanding amount.
There are many venues from which you can get extra cash. You may get some interest on your investments, inheritance, wedding or birthday gift checks, or you may even win the lottery. Whatever be the source of extra cash, pay that amount to your lender instead of spending.
You may want to spend the extra money on yourself or buy something expensive. Instead, use the money to pay off a big portion of your mortgage. Parting with the unexpected income is easier than parting with your regular income. So use it wisely and get debt free quicker.
When you are in a long term debt, you have enough time to build up a good credit score. Make timely payments on your small debts and ensure your credit score does not get negatively affected. When you credit score is good, apply for a refinance.
Refinance your existing mortgage with a shorter term mortgage instead of a long term mortgage with lower payments. The aim here is not to reduce your monthly payments but to reduce your mortgage period. If you are not in a position to make big payments every month, take a mortgage with a slight increase in your monthly payments and lower interest rate on the principal.
When you have made a few payments on time and have built up your overall credit score and your goodwill with your lender, you can try to renegotiate. Try to get your lender to reduce your interest rate. This will have an effective impact on your overall payables.
The major reason for your long term mortgage is to own or increase your assets. If the mortgage is too high and too long, it can financially and mentally drain you. Instead of retaining the house bought with the loan, sell it off. You can buy a smaller house that fits within your budget and reduces your monthly financial burden.
Once you sell the asset, you can buy a more affordable house and pay lesser mortgage on a monthly basis. This will reduce your debt as well as the financial pressure.
Everyone saves a part of their earning for their retirement. This money is sacred and cannot be touched until you officially retire. However, you can use this money to pay off your mortgage when you are still in your prime. When you still have a job and a regular income, you can take out money from your retirement account and refund it when you get the money.
When you are actively employed, it is easier to plan your finances and earn back what you have borrowed from your retirement funds. Use that money to have a debt free retired life.
If you have more than one source of income, set aside one income to pay off your mortgage. If not, apply for part time jobs that can be done in addition to the current work
If you have any investments or bonds that are earning you interest every month, use that money to make extra payments on your mortgage. Use tax refunds and any other refunds to pay off your mortgage too. Refunds are basically money that you have spent and have written off. Hence, instead of budgeting that amount for expenditure put it towards your mortgage. [PDF]Paying Off your Mortgage Faster
When you make overpayments on your mortgage, ensure your debt term is reduced and not your monthly payments. If your monthly payments are reduced, your monthly financial burden will be less but you will be in debt for a long time.
Use one of the online overpayment calculators to see how effective your overpayments are. These calculators will show you how many more years you need to pay the same amount until you are debt free. Once you have a better picture, you can increase or decrease your monthly overpayments.
Private Mortgage Insurance is the fee added to your monthly payments to protect your lender. PMI is required only if your monthly pay is less than 20% of the total cost of your house. However, if you are paying more than 20%, talk to your lender and get rid of the unnecessary PMI charge.
There are various pension schemes to help an individual have a comfortable life after his prime. The different retirement plans are:
Defined Benefit Plans – Where payments are made from a trust fund to the employee’s account. Here, the benefit receivable by the employee is defined. Here the employees receive a fixed amount every month based on their contribution to the employer.
Defined Contribution Plans – Where the employee pays a fixed amount to the retirement account and earns from the investments purchased using his contribution. This plan is sponsored by the employer and it is he who chooses the venues of investment. The profit and loss of the investment is adjusted towards the funds in the account is given to the employee after retirement.
Cash Balance Plans – A combination of defined benefit plans and defined contribution plans. A lump sum amount is paid to the employee just before retirement.
When you retire and receive your pension amount, it is to help you live a comfortable life when you are not actively earning. You can use a part of this amount to pay off your mortgage. If you have saved up for your future, you can use the entire pension amount to pay off your mortgage.
Every time you use your credit card to pay for something, you accumulate points on the card. When you have sufficient points, you can use it buy some things, either at a discount or for free. When you pay your mortgage with your credit card, you stand to gain a lot of points which can be used for future purchases. This is like free money, hence is very advantageous.
However, credit cards have a downside and that is the credit card debts. When you pay for something as large as a mortgage through your credit card, the interest payable will also be high. Ensure your payments are made on time to avoid unnecessary pile up of interests, which increases your overall debt.
Not every mortgage servicer allows the borrower to make credit card payments to their lenders. However, one can pay mortgages with credit cards through a bill pay service. The list of payees for this service is limited and the borrower might even be charged for such a payment. In such a case, you end up paying more than the actual mortgage, which has to be avoided.
A store card is like a credit card, with limitations. You can use this card only within that store and it s branches or other tie-ups. You will have credit limits, reward points and other benefits like in any other credit card.
A major benefit of these cards is that you can get it irrespective of your credit score. When you make timely payments, it can help you build your credit score. A good credit score can help you get loans and mortgages at a better rate.
However, if you utilize your credit fully or use a large portion of it, you will have a high credit utilization, which will negatively impact your credit score. Also, the reward programs are designed in such a way that you are forced to spend more to utilize the points. In short, it is a spending trap for those who don’t understand the system.
Though these are just store cards, you need to make payments on time. If not, your credit score will be negatively affected and this lowers your chances for getting a loan or mortgage.
An unsecured loan is where there is no security attached to the loan borrowed. It is not secured using a cosigner or an asset. Not all mortgage servicers allow you to pay off your mortgage with a personal loan. However, if you are good with your finances and can plan effectively, you can consider taking out a personal loan to pay off your mortgage.
This writes off your long term debt and you can get the new loan at a lower interest rate or lesser monthly Payments. Unless you are financially unstable or are in a financial crunch, it is not advisable to take out an unsecured loan to pay off a mortgage.
An offset mortgage is an arrangement where your accounts, both current and savings are linked to your mortgage account. Once linked, the accounts’ balance is taken into consideration to calculate the interest rate on your mortgage.
The interest rate on the offset mortgage is calculated as the total mortgage amount minus the accounts’ balance. The amount that is not paid or is not guaranteed is the one on which the interest is calculated on.
When you have a lower mortgage interest rate, your overall payables are reduced. Hence your monthly debt is reduced. You can also offset your mortgage and continue to pay at the same rate. This way, your mortgage will be paid off sooner and you can enjoy your new house, debt free.
Here are some of the dos and don’ts in paying off your mortgage:
|Keep a tab on your monthly payments||Do not pay a different amount every month|
|Make more payments per month or make adhoc payments to reduce debt sooner||Postpone paying up and result in a default payment.|
|Use all extra income and contributions towards paying your mortgage||Use unexpected income to purchase expensive or other items|
|Reduce your mortgage term by making payments extra||Aim to reduce the monthly payouts|
|Get professional help or use online calculators to help you calculate effectively||Just take the word of your lender and pay the quoted amount|
|Refinance and get into shorter term Mortgage/ loan||Refinance to pay less every month|
Owning your own house is a dream for many. However, a long term mortgage is a nightmare for any home owner. So, do away with it at the earliest, using the above tips and information.