Today, nine out of 10 homebuyers are choosing a 30-year fixed-rate mortgage. For many, the stability of fixed payments over the life of the loan makes financial sense, but have you ever wondered how you can pay your mortgage off faster?
Consider a few changes in your monthly budget and you may be making your last mortgage payment earlier than you expect.
1. Pay extra on your loan principal
Your monthly mortgage payment consists of a principal payment and interest payment. Your interest payment is calculated based on your unpaid principal balance. When you make extra principal payments, you are lowering the amount you're paying interest on. As a result, paying down your principal will save you on the total interest paid over the life of the loan while also reducing the total time it takes to pay off your mortgage.
Wondering where to get that extra money from?
If you are thinking about refinancing your mortgage to lower your interest rate, also consider shortening your term to a 15-year or 20-year term. Again, it's an opportunity to pay off your mortgage more quickly with less interest paid over the life of the loan.
Be aware that with a shorter term, your monthly payments are likely to increase, if that seems daunting, refinancing may not be the best fit for your budget. Be sure to discuss refinancing options with your lender who can help you find the options that best suit your goals. To get a sense of how much it may cost to refinance your mortgage, check out our refinance calculator.
3. Switch to a biweekly payment
Most homeowners pay their mortgage once every month. Instead, ask your lender if you can make two half payments, every two weeks. This shouldn't change your monthly budget too much, but with 52 weeks in a year this schedule will result in 13 full-size payments each year instead of the standard 12. If, for example, you have a $250,000 30-year fixed-rate mortgage at an interest rate of 4.5%, making biweekly payments would allow you to pay off the loan almost five years early.
These small payments will add up. Check your amortization schedule to see the amount of principal and interest you've paid, and use our calculator to estimate how extra payments may impact your loan. For more information on owning a home, visit My Home by Freddie Mac®.
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