First-time home buyers often bask in the glow of new home ownership without giving thought to the repayment schedule that usually lasts for 30 years. If you plan on early retirement or just don’t want to be saddled with long-term payments, there are several techniques that you can use to shorten the term of your mortgage.
Pay More Principal
If you take out a $150,000 mortgage loan for 30 years at an interest rate of 6.25 percent, you will actually repay the lending institution over $330,000 over the life of the loan, including over $182,000 in interest alone. However, if you pay a small additional amount each month towards your principal balance, you can watch the length of your mortgage shrink as well as the total amount you repay. In this case, an additional principal payment each month of $50 reduces the life of the mortgage by four years and saves almost $30,000 in interest. Up the ante to $100 per month, and the mortgage term goes down by seven years saving you almost $50,000 in interest. Even a one-time payment has an impact on the life of your mortgage. In this scenario, an additional payment of $1,000 at the beginning of year two, shortens your mortgage by five months and saves almost $5,000 in interest.
When you finish paying off those student loans or you get a big promotion at work, use that new discretionary income to shorten the term of your mortgage by refinancing and taking on a new mortgage with a shorter term. Refinancing is a particularly good option if you have an adjustable rate mortgage that you want to convert to a fixed rate, or if your fixed rate mortgage’s interest rate is higher than what is currently available. Government-backed Ginnie Mae cautions that refinancing often comes with steep upfront costs. It may take 2 to 3 years to recoup the upfront fees, so avoid refinancing if you plan to sell the home or condo in the short-term.
Depending on your current financial situation, you may find government lending programs available that will help you shorten your mortgage term over the life of the loan. HUD’s Graduated Payment Mortgage insurance, for example, is geared towards young families who are buying their first homes and have a limited or moderate incomes, but expect their incomes to rise over time -- perhaps a young couple finishing their graduate degrees or expecting to pass the bar exam with plans to open a law practice in the future. Under this program, your mortgage payments start relatively small and then increase over time. The additional money from the increased payments is applied towards the principal of the loan, thereby, shortening the mortgage’s term.
Accelerate Your Payments
If you have a 30-year mortgage, inquire whether your lender offers an accelerated payment schedule. Wells Fargo, for instance, offers weekly, bi-weekly payment options and semi-monthly payment options in additional to traditional monthly payments. An accelerated payment plan can have the dual effect of shortening your mortgage and saving you thousands in interest. Before signing on for any accelerated plan, however, be sure that your lender posts each payment as it comes in rather than posting once per month.
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