When we consider all of the line items in our budget, chances are that your mortgage is one of the biggest expenses. This isn’t bad, it’s just usually the way it is. Wouldn’t it be nice if we could find a way to chip away at that a little extra?
Obviously, if you chose to buy a house, the idea is that you would have selected one that you love and that you could afford. But we all know that life happens and sometimes things change. It’s not as easy to address your mortgage payments as it is to do something like negotiating your cable, but there are a few things to you can do to try to pay it down, pay it off earlier, or help your payments to get a bit smaller.
And I've got something special for this article! I'm introducing a mortgage calculator below. A REALLY fancy one. This will allow you to model paying down your mortgage faster, and also to model what it will look like to refinance or buy another home.
Paying down your mortgage faster vs. doing something else with the money – this will always be a topic of debate among finance nerds everywhere. It is totally up to you. The advantages of paying your house down quickly are saving on interest, and the peace of mind of owning your own home outright at an earlier age.
Others would argue that the extra money could be better used by investing more in your retirement portfolio. You might get a better return over the long haul. Plus, there's the tax deduction of the interest on your mortgage – but in reality, it's pretty minimal.
I listed this first as I figured it would be the least popular suggestion. Most of us love our homes and don’t want to leave them, or we are not interested in the hassle that is selling a home, buying a home and moving. I hear you!
But if you have payments that are just too big and wiggle room is not going to help you, looking for a smaller place with a significantly smaller payment might be the best option. This action would help you make smaller payments, as opposed to helping yourself pay down your mortgage sooner, like some of the next few options.
I did this. We downsized from a 3,200 square foot house into an 800 square foot townhouse, and then bought a much more reasonable 1,850 square foot house a year later. You don't have to go that drastic, but if you bit off more than you can chew with your house, downsizing might be your best option.
The other way you can try to lower your payments (or shorten the length of your loan) is to refinance. This will not work for everyone, but it is a way to re-examine the interest rate you pay, your monthly payments, and the length of your loan. This will likely have 1 of 2 outcomes. You can find a way to lower your payment, OR you slightly increase your payment but shave years off of the length of your loan. Sometimes you can even cut a 30 year mortgage down to 15 years!
Keep in mind that you will have to shop around to find the right bank, loan, and system that works for you. Some banks will not work with VA loans, so if you have one, you may not be able to refinance. Other banks will give you points on your credit card if you refinance through them. You should do some research before you call as well, so you can ask questions about things like I just mentioned, as well as if you have to pay closing costs, adjustable vs. fixed rates, etc. Keep in mind that this may not be the right option for everyone, but for some people it could make a real difference!
And since rates are ticking up, now is the time to do it!
Now we are getting into the ideas that pay down your mortgage faster over the long term, but don’t necessarily reduce your current payments. One great, and hopefully painless, way you can do this is to make a payment on the principal anytime you stumble across some extra cash in your budget.
If you are budgeting, you should have everything already accounted for, so if you receive a tax refund, a bonus, a raise, or some other sum of money, you should be able to make a payment towards your mortgage without feeling any additional strain. I know this can feel like a boring way to spend your sudden surplus, but this is the type of scenario where you are setting yourself up for the someday great feeling of your mortgage being paid off early!
Another bonus to this is that it’s pretty low commitment. If you make a one-time lump sum payment, you never have to do so again, you’re not attached to a higher monthly payment, and it’s up to you, not your bank. Do make sure that the terms of your loan won’t penalize you for making a payment like this.
Here's where making a lump sum payment makes A LOT of sense. If you have less than 20% equity in your home, chances are you are paying an extra $80 – $150 a month for PMI (or mortgage insurance). Calculate how much you will need to reach that 20% equity threshold and consider making that lumps sum payment. Your lender could probably tell you what this is.
If you make this payment to get to 20% equity, make sure to call your lender and tell them to cancel PMI. They don't automatically do it.
This is a fun and somewhat tricky way to pay a little extra on your mortgage each year! Basically, if you make a monthly payment, you will make 12 payments in year. If you make biweekly payments (of half the monthly amount), you make 26 of those half payments each year, which actually equals 13 monthly payments. Depending on when you begin to make these payments, you can actually cut a few years off of the length of your loan! You can ask your bank to set this up for you, but you do need to check if they will do it for free or charge you. If you are disciplined enough and do well with your budget, you can just do this on your own as well.
I do not recommend bi-weekly payments if your bank will charge you to do it.
Play with the mortgage calculator to see how this could change your payoff date!
There are these very handy tools out there called mortgage calculators, which allow you to plug in all of the terms of your loan and see how doing things like making a biweekly payment or adding a bit to each payment would affect the long-term look of your loan. You can see how much of a difference you can make by employing any of the strategies listed here or how adding any given amount to each payment will look. (Always make sure that the extra is being applied to the principal.)
If you add a bit to each payment, not only does it benefit in the long run, but it reduces your overall principal, which in turn reduces your interest. This can affect the life of your loan, or, depending on your bank, sometimes result in lower payments along the way.
Sometimes the bank through which you got your mortgage loan will offer other perks you can use to help pay down your mortgage. For example, if your mortgage loan is through Wells Fargo, they offer a credit card, which instead of earning a percentage in travel perks or cash back, gives you that percentage back as credit against your principal balance. This is an easy way to work on paying down your principal that doesn’t actually require dollars out of your wallet. Of course, you would want to do your research carefully and decide if you are able to make credit cards work for you. This is not worth it if your relationship with credit cards does more harm than good!
If you're up for it, there's a crazy trick that some use to really accelerate their mortgage payoff. It involves leveraging the equity you already have in your home. It's awesome and I'm currently considering it. I'm not gonna go into detail here, but my friend Natalie Morris did a fantastic job breaking down how this mortgage payoff ninja trick works. Check it out on her website HERE.
While finding ways to reduce your mortgage are not as simple as other budget line items, with a small amount of work, you can really find a few ways to either reduce your payment or your long term loan. This is something that future, retired you will be so grateful to have done.