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February 1, 2020

Tips to Pay Down Your Mortgage – FAST!

If you’re like most homeowners, you love your house and everything it represents. However, paying the hefty mortgage payment isn’t on the top of your list of favorite things to do. You may even dream about the hundreds of other things you could do with that money every month. You may fantasize about an early retirement, starting your own business, taking a string of long, relaxing vacations or simply bankrolling a secure retirement. In any case, you know you’d love the freedom of not worrying about what is most likely your largest monthly bill. If only there was a way you could have the home you love, but without the mortgage!

Believe it or not, there are some slick secrets that will help you cut the term of your mortgage dramatically – perhaps even by half. Interested? Sit back and let the experts at Ernest Homes show you how!

It’s Not Too Taxing…

If you’re a taxpayer who typically gets a refund, you’re in a great position to pay off your mortgage early. Let’s say you get back $2,700 each year, which according to the IRS was close to the average refund received in 2018. When your refund arrives, you put it down on your mortgage the following month. If you have a $200,000 mortgage with a 30 year term, and follow this plan for 5 years, you’ll trim 4 years off your mortgage and pay $35,000 less in interest. If you work the plan for 10 years, you’ll eliminate 7 years of mortgage payments and save over $54,000 in interest!

Think Twice…

A month! Switching to a bi-monthly mortgage payment is another great way to finish early. However, you don’t want to simply pay half of your payment twice a month. Most mortgage lenders will hold your monthly payment until they receive the full amount, so this method won’t actually help you get ahead. The secret is to take your monthly payment and divide that number by 12. That 1/12 of the payment will now become the amount extra you’ll pay every month. To use our earlier example, let’s look at a $200,000 mortgage at 5% for 30 years. The monthly mortgage payment is $1,074. If you divide this by 12, you get $89.50. For this fast-pay trick to work, you’ll pay $1,163.50 towards your mortgage each month. By the end of the year, you’ll have made an additional 13th payment on your mortgage, saving you over $33,000 in interest charges and shaving off almost 5 years of mortgage payments.

Reward Yourself with Mortgage Savings

Shop around for a credit card that allows you to accumulate cash back rewards. There are a lot of options out there now, and many of them offer percentages back on items you use every day. Groceries, gas, utility bills, recurring purchases or other common charges may qualify depending on the card you choose. Most credit cards offered by larger banks will allow you to cash out your rewards and transfer the proceeds into an account you’ll open with them. At the end of the year, you can take the “cash” you’ve earned that year and put it toward your mortgage. Here’s a quick guide to some of the cash back cards out there. You can also inquire with your current bank to see if they offer a similar card to their customers.

Frontload Your Mortgage Payments

During the early years of your mortgage, you’re paying much more interest than principal. This makes perfect business sense – your lender wants to get their investment back as quickly as possible. The sooner you pass the threshold where you’re paying more to your lender than you are on the bulk of the loan, you’ll whittle away more and more on the principal. To use our handy 30 year, $200,000 mortgage at 5% example, what would you happen if you paid an extra $200 each month for the first five years? You would save almost $31,000 in interest and chip away 2 years of mortgage payments.

“Fake” a Refinance

Use this mortgage calculator to plug in the numbers you would like to see if you were to refinance your mortgage. Actually refinancing your mortgage is a choice if you have good credit and a dependable payment history, but there are typically costs associated with this option that you’ll be responsible for paying. If you can firmly commit to paying the “new” mortgage amount every month without actually refinancing, you’ll get the benefits without the expense. Let’s refinance our $200,000 at 3.25% for 15 years. We would now have monthly payments of $1,400 instead of the current payment of $1,074 per month. If you “fake” a refinance at year 5 of your mortgage and start paying $1,400 each month, you will knock 10 years off your mortgage and save almost $55,000 in interest charges.

Round ‘Em Up

While not as dramatic as some of the other methods, you can still save on interest and cut short your term length if you simply round up your mortgage payment every month. Our classic example of a $1074.00 per month mortgage payment rounded up to $1100.00 per month is only an increase of $26 per month, but you’ll trim 2 years from your mortgage term and save over $10,000 in interest. It’s amazing what giving up one lunch out for two every month can do!

Want to move things along even faster? Try combining some of these tips to shave off more time and keep more of your hard-earned cash. Round up a “fake” refinance or make two payments a month and turn your cash back rewards into another lump sum payment. One, two or all methods can work - the choice is yours!

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