Hope you all had a great long weekend!
For myself, it was spent spending quality time with family and friends hanging out, playing cards, and sharing good stories but it also involved helping one of my friends move into his first home.
In light of the conversation we had regarding possible ideas to pay down his new mortgage quicker. Here are four tips we came up with.
Accelerated Weekly Payments
He was initially set up with a monthly mortgage payment structure. This would involve him making mortgage payments twelve times a year. After crunching the numbers into a mortgage calculator and seeing the resulting interest savings from switching from monthly mortgage payments to accelerated weekly payments which involves making mortgage payments fifty two times a year. He couldn’t believe the savings.
His mortgage is around $300,000 and we assumed over the life span of his 25 year mortgage his interest rate would on average be 4%. Just changing his mortgage payments from monthly to weekly will save him $25,725 in interest and pay off his mortgage in 21.8 years “3.2 years sooner”.
Increase Your Mortgage Payment Amount
The smallest increases in your mortgage payment amounts can make a significant difference. His monthly mortgage payments totalled $1,419/month. He decided to increase this to an even $1,500 a month, which after switching to weekly mortgage payments works out to an extra $20 a week. A small amount of money to reduce from the weekly expenses but results in an additional interest savings of $9,150 and pays off his mortgage in 20.5 years “another 1.3 years sooner”.
Refinance With A Shorter-Term Mortgage
The effects of inflation are often thought about in terms of reducing your current moneys future purchasing power. Which is true, but inflation also has a positive effect on being able to pay off our mortgage quicker.
Often throughout our working career we receive annual raises from the company we are employed with which keeps pace with inflation. In 20.5 years assuming an interest rate of 3% per year you would need $2,750 to purchase what $1,500 buys you today. Or another way of thinking about it is your $1,500 would be able to buy you $818 worth of goods today. With this in mind it makes sense that every 5 or 10 years you could refinance your mortgage to a shorter term. This would increase your weekly mortgage payment amount but the effect on your budget and lifestyle would be the same as 5 to 10 years ago when you were paying $1,500 a month.
Put Money Windfalls Toward Your Mortgage
Money windfalls are great such as inheritances, tax refunds, or an annual bonus. Putting that money towards your mortgage will dramatically reduce the amount of interest paid and your mortgage term.
While it isn’t the most exhilarating or make for a long interesting conversation by the water cooler amongst your coworkers. Knowing you reduced your mortgage term by a couple months and possible years, will make for very interesting conversations as coworkers ask how you paid off your mortgage many years quicker then they did.
A couple other ideas I should mention that my friend did was shop around with various lenders other then the one he does his banking with to find the lowest rate being offered, and went with a variable interest rate instead of a fixed interest amount.
Let me know if you have any additional tips we missed to pay off your mortgage quicker.