If we've spoken in person, you probably know I loathe "all or nothing" advice. I don't think there is one way to be financially sound. We can handle our finances differently and both end up financially secure, that's the beauty of choice. I wanted to issue that disclaimer because today I'm sharing 6 tips to pay off your mortgage faster. Why does that need a disclaimer you ask? Because I don't ever plan on paying off my mortgage. I plan to have a mortgage on my primary home until I die, and I will share my reasoning in a future post. That being said, there are people who believe in being and desire to be debt-free, and a mortgage is oftentimes a person's largest debt. So if you are in that camp, it's only right that we freely share! Check out some quick ideas that could help you knock down your debt ahead of schedule.
1. Switch Your Payment From Monthly To Biweekly
When you pay your mortgage monthly, you are following the schedule the bank has set to pay off your mortgage in a given period of time. A payment for a 30 year mortgage, for example, is going to be based off of your paying 12 monthly payments each year for 30 years. But when you cut your payments in half and pay them biweekly (every other week) rather than monthly, you can pay off your mortgage faster. Why? Let's do the math: There are twelve months in the year, meaning 12 full payments when you pay annually. But there are fifty-two weeks in a year, meaning you will pay 26 biweekly payments, and THIRTEEN full payments. The same result can be achieved by simply saving up for an extra payment each year, but paying biweekly takes advantage of one of the cool things about our financial behaviors: once we get used to paying something automatically, we eventually stop noticing its impact. By switching methods, you will potentially knock years off of the balance of the loan.
2. Check Your Interest Rate
If you're trying to pay off a mortgage quickly, it's always worth looking around to see if current interest rates are more favorable. And older loans aren't the only ones that could be improved. My wife and I took out a 30 year home loan in 2012, and just two years later found that we could refinance to a 20 year mortgage with a lower interest rate, without increasing our monthly payment! That means even with no extra commitment, we knocked 8 years off of the length of our current mortgage. It might interest you to shorten the term of your mortgage, even if it leads to higher payments. If you're worried about the increased commitment however, checking your interest rate could give you additional options. If for example you want to stay on a 30 year loan but with a better interest rate, refinancing could offer you a lower payment each month. If you keep making the same payments as before, you can apply those additional funds directly to the principal and still put yourself on track to pay off your home ahead of schedule.
3. Attack Your Escrow
Most mortgages payments are split between at least three categories: 1.) principal, meaning the amount of the actual loan, 2.) interest expense, and 3.) escrow. Escrow is a holding account where a portion of your payment is set aside to cover property taxes and homeowners insurance. It's tempting to only see interest rates as the way to lower payments, but escrow offers opportunities as well. Your homeowners insurance should be shopped every couple years to see if there are more competitive rates available in the marketplace. One might also find that they have more coverage than they need. If you pay homeowners insurance that protects $20,000 of personal items and you know the value of your personal items is only $10,000, you could potentially reduce your coverage and pay a lower premium. The second element of escrow, property taxes, is also potentially negotiable. The property taxes you pay are based on what your county considers the value of your home. If you feel their valuation is too high, you can request a new assessment. If your appeal works and the value of your property with the county is decreased, you will then pay less in property taxes. Both of these options could help lower the amount you're required to pay each month. As with our other recommendations, don't just stop there: keep the same monthly commitment and direct your savings towards the principal.
4. Banish PMI!
PMI can be the fourth component to a mortgage payment for some borrowers. If you're not aware, PMI, or private mortgage insurance, is insurance that a lender takes out to protect themselves in the event that you default on the mortgage. But here's the kicker: YOU PAY FOR IT! Banks are not in the business of taking bad risks. If you apply for a mortgage, they want you to bring a certain percentage of the home's value to the table as a down payment. This down payment represents your "equity" in your home, the amount of ownership you have in the property. Historically, the equity requirement has been 20%, meaning any lender who doesn't have 20% equity is likely to have PMI added on to their mortgage payments. With PMI payments ranging from 0.5% to 1% of the value of the loan, the numbers can add up. On a $150,000 home, this would mean an additional $750 to $1,500 added to your payments for the year. If you want to banish PMI for good, one option is to check and see if you've made enough payments to meet the 20% threshold. While some loans cause PMI to drop off automatically when you attain enough equity, others require you to make this request to the lender in writing. Another option is to refinance your home. Not all lenders require 20% equity from borrowers looking to avoid PMI. If you find a bank that only requires 10%, for example, refinancing could allow you to avoid PMI even if you don't meet traditional requirements.
5. Participate In The Gig Economy
You can fight it all you'd like, but we are now living in the "Gig Economy". Uber, Postmates, Fiverr, you name it and over 44 million Americans are doing it to make money on the side. And of all the side hustles in which Americans participate, some of the highest earners are the ones who are renting out their homes. If you want to make some extra scratch and are really serious about it, turning that house into a money-MAKER is worth considering. If you're interested, contact your homeowners' insurance carrier to make sure you have coverage for any damages done during a short-term rental. You may need to adjust your coverage to be protected in the event of a rogue weekend tenant.
6. Be Real About Your Needs
We all have points where we must come to grips with our limitations. I've seen clients who realized they couldn't keep a sports car if they wanted to meet their goals. I've met others who have cut back on vacations. But in my experience, the hardest thing to get a client to do is get out of a house that doesn't help them meet their goals. If you're comfortable with having a mortgage for the entirety of the term, this advice is not for you. As I said when we started, I plan to always have a mortgage on my home. But if YOU have decided that it's important to pay off a mortgage early, but the payments are too high to do so ... a decision must be made. It doesn't mean downsizing in square footage, or that you have to live in a shack. It may simply mean finding a house nearby with a lower mortgage, or less property taxes, or no Homeowners Association payment. The fact of the matter is, if your house doesn't help you in attaining your goals, it's the wrong house, no matter how close it is to your favorite coffee shop. If you're on the track that makes you happy then continue on that path. If you're not, I'm sure the savings on your new home would pay for pretty nice coffee maker!