For quite a few homeowners the prospect of being in debt for 30 years is a painful prospect. If you decide to repay your mortgage early and invest, it all boils down to one thing: interest rates. If you take out a 30-year mortgage, the vast majority of your monthly mortgage payments will go towards interest on the mortgage. If you already make your payments every month, you can add another payment to what you pay for it. You may not even miss the extra payment, but if you deposit an extra month each year, you can pay off your loan faster than if you paid it off in five years.
If your goal is to pay off your mortgage in five years, you need to choose a specific date to fulfill your plan. Depending on your financial situation, it may make sense to pay off the mortgage in six or ten years. Don’t worry our five steps below will make sure you are doing everything right to pay off your mortgage early:
1. Put at least 20% Down (If Possible)
Not everyone can put down 20% on their dream home but there are several advantages of doing so. The most obvious benefit is taking care of a large chunk of the total mortgage right off the bat, which will help you pay it off faster. This also transfers into the interest amount as it will be less over the life of your home loan.
Another hidden benefit is that lenders may wave your private mortgage insurance (PMI) fee if your down payment is 20% or over. This insurance fee can end up costing you thousands of dollars each year, yet easily remedied if your home equity remains over the 20% threshold.
2. A 15-Year Repayment Plan Is Best
Like we mentioned at the beginning a 30-year mortgage is quite a long time to be in debt. Not only does this save time but also on 15 years of interest payments, bringing thousands of dollars back in your pocket. If you currently have a 20 or 30-year loan and are looking to switch you should know that there will be fees associated with refinancing. For this reason, we make our mortgage calculators easily available here.
If after calculating associated refinance fees and conclude it’s out of your budget you can always set your own accelerated payment plan. For example, if you are currently on a 30-year mortgage plan you would simply double your payment amount to hit a 15-year goal. Obviously, you can apply this same mentality if your goal is paying off your mortgage in 5 years.
3. Consistent Bi-Weekly Payments
A bi-weekly payment sets you up for success since after every year you end up paying upward to an extra month’s payment each year.
It’s important to keep in mind that not all lenders will allow you to make bi-weekly payments and may charge a fee to process the additional payments. Our advice? Avoid the fee and instead divide the extra payments within your yearly payments, adding the amount to each of your current monthly payments.
4. Tighten Your Financial Belt
We know, we know, this is not easy otherwise I’m sure you would’ve done it already. However, setting the goal to become mortgage free in five years takes some serious dedication. To reach it you may have to consider cutting certain luxuries and live more frugally. Most, if not all, extraneous expenses will need to be put on hold while your disposable income is being funneled into your mortgage.
If budgeting sounds daunting try the 50/30/20 rule, a simple breakdown of where to put your money. According to the rule, 50% of your expenses should go to needs – like food and mortgage payments – 30% should go towards “fun” purchases – and the remaining 20% should go towards savings.
Persistence is key. Like with any habit, adjusting to a budget takes time. Don’t get frustrated if you don’t get it completely right the first couple of months.
But Should You Pay Off Your Mortgage?
Being smart with your money has never been more important, so don’t dig yourself into a hole trying to pay off your mortgage early if it doesn’t make sense. Throwing all of your savings or racking up credit card debt just digs you into a bigger financial hole that may cost you more in the long run. However, if it makes financial sense, paying off your mortgage in five years is a colossal achievement. Get your mortgage started on the right foot and check out our home loan calculators to see what kind of payments are available to you now!