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Paying off Your Mortgage Early

September 11, 2011

By: Jim Oosterman
Melrose Bank

Buying a home can be a very rewarding experience. It is a great feeling to know that you can financially support yourself and take on the many responsibilities that come with home ownership. While rewarding, buying a house is also incredibly expensive, and most will need a mortgage loan that may take up to 30 years to pay back. To some, two or three decades seem to be an overwhelming amount of time to pay off a debt. If you are looking to pay off your mortgage early, there are several techniques to help you reach that goal.

Refinancing
Homeowners can choose to refinance their mortgage to a shorter term, say from thirty to fifteen years, if they are looking to pay off the mortgage early. While this strategy can dramatically reduce your years of debt, be aware that your monthly payments will increase unless you’re able to refinance to a significantly lower interest rate.

To refinance, the homeowner must apply for a new mortgage and the home will undergo a new appraisal to determine its value. The homeowner’s credit file will also be reviewed. If all of these items meet the lender’s approval, the new loan will be approved.

There are some risks associated with home mortgage refinancing. First, some fixed-term loans have penalty clauses that are triggered by an early repayment of the loan, in part or in full. There are also loan closing fees and transaction fees on the refinancing. It is best to consult with your lender to discuss the benefits or consequences refinancing could provide you.

Bi-Weekly Payments
If refinancing is not an option for you, there are alternative methods available that will help with paying off your mortgage early. One such method is to make bi-weekly mortgage payments. Some lenders, as well as some companies who will manage the payments for you, allow bi-weekly mortgage payments which make one-half of your monthly payment every two weeks. Managing payments this way will result in 26 half-payments over the course of a year or the equivalent of 13 full monthly payments.

When you make the equivalent of one additional annual payment, you will significantly reduce the amount of interest you pay on your loan since this additional payment goes directly to reduce the principal balance. With this one simple step, you can reduce the term of a 30-year loan to less than 26 years.

Some companies may offer to manage payments for you, but beware of hidden fees.  You can accomplish virtually the same benefits by adding one-twelfth of your monthly payment to your regular mortgage payment, thereby paying an additional one payment over the course of a year directly to your principal balance.

Additional Principal Payments
The principal of a loan is the amount borrowed, excluding interest. In a typical loan amortization schedule, the principal and interest are separated so you can see how much of your monthly payments go toward paying off the principal and how much goes towards paying off the interest. You can add extra principal payments each month to help shave years off your mortgage.

If you have a $200,000 mortgage through a 30 year payment plan with 6% interest, even just making an extra principal payment of $50 a month can help. If you make this extra monthly payment from the beginning of your loan period, you can reduce the length of your mortgage by three years.

Lump-Sum Payments
If it is too hard for you to follow a set schedule of making prepayments, just add extra money to your regular payment schedule whenever you can. Inheritance money, tax refund, or even a large work bonus could significantly help your mortgage payment. Every little bit helps!

Reaching Your Goal
Not every payment plan works for everyone, so it’s best to find the method that is suitable to your lifestyle. Whichever method you choose, paying off your mortgage early will not only reduce your financial stress, but will give you the freedom to put those funds to other good uses, such as savings, college tuitions and retirement.

Want More Information?
Your local community banker is a wonderful resource for information about obtaining a mortgage loan, refinancing or exploring options for early or accelerated repayment. He or she will be happy to answer all of your questions.

James Oosterman is the Vice President of Melrose Bank. He can be reached by telephone 781-665-2500, online at melrosebank.com or on Facebook at facebook.com/MelroseBank.


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