A home can be a great investment, but could you imagine paying off a loan for 15 or even 30 years? A great way to strengthen your financial future is to reduce your mortgage term or payments. Here are some ways that are proven over time to reduce your mortgage term or payments in a legal, effective way.
Mortgage PrepaymentsMortgage Prepayments involves paying more towards your principal each month over what your payment is with the mortgage company. The best mindset to have with your Mortgage Payment each month is that it is the “Minimum Due” with the Mortgage Company.
By making Prepayments against the balance, you can accomplish three things:
- Reduce the Principal
- Reduce the Payment
- Reduce the Term
While most of these benefits occur over time, the benefit will be considerable. An extra payment per year on the average mortgage at 9% interest rate, can reduce a 30 year mortgage to 22 years. That’s 8 years coming off your debt for small additional payments.
Be sure to watch out for Prepayment penalties, which are usually in effect for 5 years. These penalties could cost you “fines” from the mortgage company if you bring down the principal too fast. If your mortgage company has a
Prepayment penalty, do the most you can within the limits in the agreement, then set aside the extra money in a low-risk money market account or Certificate of Deposit. This will allow you to grow the money while you have to wait to use it. Then make a mass payment after the penalty is no longer in effect.
Banks may also consider these extra payments as “carry over” for the next payment. Make sure you instruct the financial institution to apply extra payments to the principal.
Mortgage RefinancingBanks are always competing for business, and with
zero point refinancing, and even lower interest rates, it never hurts to shop around every few years. Refinancing your mortgage can be a great way to reduce your principal owed and terms, but is usually dependent on the following:
- Rates available that is lower than your current mortgage rate.
- A time period of 5 years has passed since your last mortgage or refinancing.
The goal in this situation is not to tap into additional equity, but to obtain better rates and terms on your mortgage. For some, this can reduce their interest rate by 1% or more, which may not seem much at first, but makes a difference in the payments.
As with making prepayments on your mortgage, be sure to pay close attention to your current mortgage agreement, and the one being presented to you. Finding mortgages with no pre-payment penalty allows you to bring down your payment faster.
Evaluating Your Homeowner’s Insurance and Property TaxesFor many, their
homeowner’s insurance, and taxes are paid from an escrow account developed by their lender for the sole purpose of maintaining them. A good practice that can save you hundreds of dollars a month is to evaluate your Homeowner’s Insurance every two years.
Similar to banks, Insurance companies compete heavily for business as well. You can end up paying thousands more a year for insurance that’s equivalent to a competitor’s offering but at a cheaper rate. Spending a few hours a day every two years to research into your insurance options can be a real money saver.
These are just some of the methods that you can use to reduce your mortgage payment, and secure your financial freedom. Be sure to be fully educated in your mortgage and loan agreements. By doing this, you know what opportunities present themselves and when, so you can make the most out of your efforts.