3 Ways to Pay Down Your Mortgage More Quickly

Don’t like the idea of paying down your mortgage over the span of 30 years?
Nothing can trigger that sinking feeling in the pit of your stomach faster than looking at your mortgage statement and seeing those dreaded lines: “360 payments” and “Payoff Date: 2044.” The notion of taking out a loan in your 20′s or 30′s and finishing the payoff in your 50′s or 60′s can be daunting.
But you don’t need to adhere to a 30-year schedule. Here are seven ways you can accelerate your repayment clock, courtesy of Majestic Home Loan.

#1: Refinance Into a 15-Year or 20-Year Loan

Although a 30-year mortgage is considered the “normal default,” most financial institutions offer the option of taking out a 15-year or 20-year loan as an alternative. These loans are amortized on an accelerated schedule, which means that your payments will increasingly be applied to principal reduction, rather than interest.
Contrary to popular misconception, a 15-year loan isn’t double the payment of a 30-year loan. Yes, you’ll face a larger payment — but not double. Why?
Your mortgage payment consists of four factors: Principal, interest, taxes and insurance. Your property taxes and homeowner’s insurance will stay the same, regardless of the length of your loan, which means the only two variables that change will be the (remaining) principal and interest.
Each month you’ll divert a larger chunk of your immediate earnings towards your interest and principal payments. However, your total interest paid over the life of the loan will drop, for two reasons: First, you’ll be reducing principal more quickly, and second, 15-year and 20-year loans are usually granted at a lower interest rate.

#2: Make Payments As If You've Refinanced

But here’s the tricky follow-up question: Should you refinance? Or should you simply make extra payments as if you've refinanced, even if you remain on your original loan?
There are two major advantages to refinancing from a 30-year loan into a 15-year loan: You’ll be forced to make higher monthly payments (which result in a faster payoff) and you’ll enjoy a lower interest rate on your loan.
But it comes with drawbacks, as well. First, you’ll lose flexibility. If you face an emergency (like a job loss or a health crisis), you might not be able to afford the higher payments.
Second, you’ll endure another round of closing costs, which will add up to a few thousand dollars. (You can roll this into the new loan, if you don’t have the money available right now.) As a result, it will take you a few years to reach the “break-even” point: the point at which the interest savings from the new loan outpaces the transaction costs of refinancing.
If you’re already close to the end of your mortgage term, or if you’re willing-and-able to make such substantial extra payments that you can close out your current mortgage within a few years, then it may not make sense to refinance. Why not? Because you won’t hold the mortgage long enough to reach the “break-even” point.
If you’re concerned about either of these two drawbacks, forget about refinancing and concentrate on making enough extra payments to squash the rest of the loan.

#3: Refinance into a 30-Year with a Lower Interest Rate

Did you take out a mortgage loan prior to the recession, when interest rates hovered around 5 to 6 percent? If so, then you may be missing out on an opportunity to reduce your interest rate — even if you stick with a 30-year loan.
If you have strong credit and a low debt-to-income ratio, talk to Majestic Home Loan about refinancing into a 30-year loan at a lower interest rate. (Ideally you’d refinance into a 15-year or 20-year loan, but if you can’t afford the higher monthly payments, then refinancing into a 30-year loan at a lower rate is a strong second choice.)
If you refinance into another 30-year loan, your monthly payments will drop, rather than increase. While this will save you interest over the life of your loan, it won’t accelerate your pay-off date. (In fact, it may extend that date even further out into the future.)
But there’s an effective work-around.
Refinance into a 30-year mortgage with a lower rate, and then continue making the same monthly payment that you were previously making. This “extra” money (the gap between your new, lower monthly payment and your original monthly payment) will get applied to the loan as an extra principal payment. And this will accelerate your payoff date.
In other words: Plan to continue making the same monthly payment that you’re currently making. Your budget won’t change. But with your refinanced mortgage, more of that money will get applied to the principal.
For more information about these tips and more, call Majestic Home Loan at 1-877-546-2145 and speak to one of our licensed loan officers. Make your home Majestic.

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