Stock investing for dummies –
While we normally talk about student loans on this blog there’s another huge debt most of you will take on at some point in your life (if you haven’t already.) That debt is a mortgage.
Personal finance is very personal. Depending on who you ask paying off a mortgage early could be a great move or financial suicide.
It’s very true that it’s possible to earn more money by investing your extra cash rather than putting it on a mortgage. It’s also true that paying off your mortgage earns you a guaranteed rate of return plus the financial security that comes along with it.
So, should you plan to pay off your mortgage early?
The answer to that depends solely on your individual personality and financial goals.
If you’re like me, hate paying monthly payments and despise all types of debt, then killing your mortgage is probably on your bucket list.
If so, here are ten ways to pay off your mortgage quicker.
Before You Buy
If you don’t already own a home there a few things you should do before you buy. Following these steps can save you a boatload of cash in the long run.
# 1 – Have a Good Credit Score
In order to get the best interest rate on your mortgage you need a good credit score. Period.
If you have a subpar credit score and receive a high interest rate on your mortgage you’ll pay a whole lot more.
Example: You take out a mortgage of $150,000 and get a 7% interest rate. Your monthly payment is $799. Over the course of thirty years you pay a total of $287,411 for your house.
Your friend with good credit takes out a $150,000 mortgage and gets a 4% interest rate. Her monthly payment is $573. Over the course of thirty years she pays a total of $206,243.
You paid $81,168 more than your friend over the course of a thirty year mortgage. This makes it pretty easy to see why you need to have a good credit score before obtaining a mortgage.
Work on your credit score before taking out a mortgage.
# 2 – Have at Least a 20% Down Payment
If you’re getting a conventional loan to purchase a house and the loan to value ratio is greater than 80% you’ll be stuck paying PMI. PMI stands for Private Mortgage Insurance and protects the lender in the event you default on your loan.
Putting at least 20% down not only reduces the future balance of the mortgage you’ll be trying to pay off but can also cost you several hundreds of dollars per year in the form of PMI.
Do you best to come up with at least 20% down.
# 3 – Shop Around
If you have a great credit score and a nice down payment you’re in a good position to get a less expensive mortgage.
Before you pull the trigger on purchasing a home, shop around. Figure out what you want and try to locate a deal if at all possible.
# 4 – Have an Emergency Fund First
Last but not least, you need an emergency fund before you buy a home.
As a homeowner you never know what’s going to go wrong.
I recently bought a house and am extremely thankful for the cash I had set aside. Not long after purchasing the house I had to get a new roof put on and now have to purchase a new fireplace insert before winter hits. Just those two things have cost me several thousand dollars.
No house is perfect. Have cash set aside specifically for home repairs and put some money in an emergency fund for other inconveniences.
Pay It Down Faster
If you’re already a homeowner and can’t wait for the day when you’ll be mortgage-free, here are some things you can do to pay off your mortgage faster.
# 5 – Make Biweekly Payments
Making biweekly payments can save you money if your mortgage interest is compounded daily. To go this route simply make a payment on the 15th and 30th of every month.
While this process will not exponentially speed up the mortgage payment process it can knock a few payments off the lifetime of your loan without you ever applying extra money. Not a bad deal!
Before doing this you do need to check in with your mortgage provider to see if they accept early payments and how those are applied.
# 6 – Make One Extra Payment per Year
Again, making one extra payment per year won’t help you pay off the mortgage in record time but it will help you get there faster. Especially, if you start doing this from the very beginning.
# 7 – Put Extra Cash toward the Balance
If you’re super motivated to get your home paid off then start putting all of your extra cash toward the balance.
If you have a mortgage company that allows you to make multiple payments per month then start putting any extra cash toward the loan.
I personally have my mortgage set up through my local bank to where I can make payments online. I love being able to watch that balance drop, even if only a little, every time I make a payment.
If you’re wondering where to get cash think about bonuses, cash gifts, tax refunds, and side hustle money. Every little bit helps.
# 8 – Set a Date and Work Backward
My goal is to have my mortgage paid off in 8 years. I chose this goal because it’s something that will stretch me but not make me too uncomfortable.
I recommend that you start by using an online mortgage pay off calculator. (I really like this one as it has options for one time lump sum payments, annual one time payments, and monthly additional payments.)
Figure out when you’d like to have your mortgage paid off and from there you’ll be able to calculate the additional payments you’ll need to make each month. Or you can play around and see how much time adding different amounts of money will save you.
# 9 – Be Careful When it comes to Refinancing
If you’ve a got mortgage with a high interest rate it may make sense to refinance to a lower interest rate if you’re credit allows. However, this is not always true.
If you’re thinking of refinancing work out the math first.
When you refinance you’re going to incur closing costs. These can add up to several thousands of dollars and are sometimes much more expensive than sticking with your current mortgage.
# 10 – Keep On Keepin’ On
Unless you’re uber-rich or found one heck of a deal on a house, paying off your mortgage is going to take time. Just stick with plan, adjust when needed, and remember nothing great happens overnight!
– stock investing for dummies