When it comes to homeownership, many of us dream of the day we will be mortgage-free. While most mortgages operate on a 25 to 30 year amortization schedule, there are several strategies you can consider to pay off your mortgage quicker. Here are some effective ways to accelerate your mortgage repayment:
Review Your Payment Schedule: Taking a look at your payment schedule is an easy way to start paying down your mortgage faster. Consider moving to an accelerated bi-weekly payment schedule. This leads to slightly higher monthly payments but results in approximately one extra payment per calendar year. This simple adjustment can reduce the total amortization by multiple years.
Increase Your Mortgage Payments*: Another effective strategy is to increase your regular mortgage payments. Most lenders offer pre-payment privileges that allow you to increase your payment amount without penalty. Take advantage of this option, especially if you've received a raise at work or have extra funds. Putting these additional amounts towards your mortgage reduces your balance without significantly changing your spending habits.
Make Extra Payments*: If your mortgage allows for it, making annual lump-sum payments of 15-20% of the original loan amount can significantly reduce your mortgage balance. Consider using any extra money you receive, such as a work bonus or inheritance, to make these additional payments.
Bi-weekly or Weekly Payments: Instead of monthly payments, explore bi-weekly or weekly payment options. Making more frequent payments reduces your outstanding balance faster and saves on interest over time.
Use Lump Sum Payments: If you come into a significant sum of money, such as a tax refund, bonus, or inheritance, consider making a lump sum payment towards your mortgage. Applying this extra money directly to your principal can substantially reduce your mortgage balance and decrease long-term interest payments.
Downsize or Rent Out Space: If your financial situation allows, consider downsizing your home or renting out a portion of your property. By reducing your housing expenses or generating rental income, you can allocate more funds towards paying down your mortgage.
Cut Expenses and Increase Savings: Assess your monthly budget and identify areas where you can cut expenses. By reducing discretionary spending and reallocating those funds towards your mortgage, you can accelerate the repayment process. Additionally, automate regular contributions to a savings account dedicated to making extra mortgage payments.
Negotiate a Better Rate: Depending on your mortgage type, you may want to consider renegotiating for a better rate. This can help reduce your overall mortgage payments and the amount of money paid towards interest. Explore this option when your mortgage term is up for renewal, and consider switching to a new lender if they offer a lower rate.
Refinance to a Shorter Amortization Period: When your mortgage is up for renewal, consider refinancing to a shorter amortization period. Although this leads to higher monthly payments, it reduces the total interest paid over the life of the loan. Determine what you can afford and how quickly you want to be mortgage-free to choose the best new amortization schedule.
Mortgage Recasting: Another strategy to consider is mortgage recasting. Make a large lump sum payment towards your principal balance and have your lender recalculate your monthly payment based on the reduced amount. This approach can lower your monthly payments while keeping you on track to pay off your mortgage faster.
Remember to review your mortgage package or consult with a mortgage expert to ensure these options are available to you and to understand any potential penalties.