A question we regularly receive at Mortgage Atlanta, particularly from our clients who are eyeing retirement or are already on a fixed income, is, “How can I pay my mortgage off faster?” In most financial circles, a good rule of thumb is the “28 Rule” – spending no more than 28% of your monthly gross income on housing costs, including mortgage and homeowner’s insurance. However, when you have a particular goal in mind – like lowering your monthly expenditures in time for retirement, it’s entirely okay to blur the line on that percentage. We looked to our experienced loan specialists for their advice on various ways to eradicate that big monthly check faster, and this is what they revealed…
Increase Your Monthly Payment to (or Beyond) 28%
If your mortgage payment is not currently at 28%, you may want to determine what 28% of your gross household income is each month and then increase your payment to hit that number. For example, if your annual gross household income is $200,000, your monthly gross income is $16,667. Let’s say you currently pay $2,800 towards your mortgage and homeowners’ insurance – that means you are only paying roughly 16.8% of your monthly gross income. If you paid 28% of your monthly gross income, that would put you at a $4,666.76 outlay to your mortgage company each month. That’s $1866.76 above and beyond your current payment. If you feel comfortable increasing it to 30 or even 35% of your monthly gross income, you’ll begin to chip away fairly quickly at your overall principal. 35% at the amounts already outlined would more than double your monthly mortgage payment, meaning you could effectively pay your house off in half the time.
Apply the 1/12 Rule
This one is a little easier in the math department. Take your monthly mortgage and divide it by 12, then take that resulting amount and add it to your monthly mortgage as your NEW mortgage payment. By the end of the year, you’ll have made the equivalent of a 13th mortgage payment, and at the end of 12 years, you’ll have made the equivalent of a full year’s payments. It’s definitely not as fast a solution as the one outlined above, but it’s a positive start for homeowners who don’t have a lot of wiggle room in their current payment.
Pay Half of Your Mortgage Payment Every Two Weeks
There are 12 months in a year but also 52 weeks. Not all months are four weeks in length. By making two bi-weekly payments each month, rather than just one monthly payment, you’ll have made the equivalent of one additional monthly payment by year’s end. Again, this is an excellent solution in forward progress for the homeowner who doesn’t have a lot of latitude in the amount of their payments. However, make sure your mortgage lender allows for bi-weekly payments – many have systems that are set up solely for a monthly payment.
Refinance at a Lower Interest Rate, but Continue to Pay Your Current Monthly Mortgage Amount
Communicate with your loan officer that you are looking for a lower interest rate that will make refinancing worth your while (AND the expense of any associated closing costs). The national interest rate at the time of publication of this blog was 7.62%. If you purchased recently at a rate north of 7%, you could save some serious cash by locking in at what we hope will be more in the neighborhood of 5% in the coming year. Let’s say you purchased a home for $250,000, put 20% down and have a solid credit score, at 7.62%, your monthly payment for a 30-year fixed mortgage could be $1988.53. At 5%, it would be $1583.26 – saving you over $400 a month! But here’s the trick: if you refinance at a lower rate but pay your original mortgage payment of $1988.53, you’ll be paying more than $400 over your mortgage payment each month or $4,863.24 over your mortgage payments for the year!
Refinance for a Shorter Mortgage Term
It makes sense for a lot of borrowers that shortening your 30-year fixed mortgage to a 15-year fixed mortgage is a viable way to pay your mortgage off faster. However, it’s important to recognize that this popular option binds you to a higher payment each month. Situations can change, and signing on the dotted line means you’ve committed to making that payment each month. The prior suggestions all give you the leeway to push pause on your plan if you or your spouse gets laid off, falls ill, or any other unforeseen circumstance that might make those higher payments far more challenging to cover. That said, a shorter mortgage term is not without its benefits. You’ll enjoy a lower interest rate and will, therefore, pay less interest over the life of the loan. You’ll also build equity faster.
When You Have a Windfall, Give it Back to the House
Finally, a great way to pay your mortgage off faster is to apply all tax refunds, inheritance checks, and/or bonus payments to your mortgage. When used in conjunction with one or more of the suggestions above, you can knock off a large amount of your mortgage principal over the life of the loan fairly quickly. Simply prioritize paying your mortgage off quickly and focus your efforts there. Removing one of the most significant monthly payments many of us have in our household budgets will undoubtedly make for a much more enjoyable, worry-free retirement.
The sooner you develop and launch a strategy, the sooner you can pay off that mortgage and reallocate that payment to savings and investments. While the suggestions above offer a great starting point, the best way to create a solid plan is to share your wishes with your mortgage loan officer. Together, you can craft an actionable plan based on your unique circumstances and wishes. To start a dialogue with Mortgage Atlanta’s Brian Berman and our team of loan officers, call us today at 678.564.1522 or email us at bberman@mortgage-atlanta.com – 24 hours a day, seven days a week. Whatever the inspiration for paying your mortgage off faster, we welcome the chance to help you set – and MEET – your goals!
