The Fourth of July is almost here, reminding us all of the hard-won independence our ancestors, biological and national, secured for us on a number of levels. Most of us are legally (technically) free from the bondage suffered by our forefathers and foremothers, whether it be freedom from religious persecution or freedom from literal slavery. And that’s something for which we should all be truly, deeply grateful.
By the same token, many of us experience as bondage the looming balances and monthly payments associated with consumer debt and, in particular, our mortgages. All those zeroes!
This Independence Day, here are five ways you can tackle the daunting challenge of declaring independence from your mortgage company:
1. Pay twice a month. It’s an oldie, but a goodie, so it bears repeating: If you make half a mortgage payment every two weeks, you will painlessly make an extra full payment every year. (Fifty-two weeks divided by 2 results in 26 payments, or 13 full monthly payments.) You can get the same result by simply adding 1/12 of the monthly mortgage payment to every month’s payment and instructing the mortgage company to apply the overage to your principal mortgage balance.
Over time, these extra annual payments add up! Precisely how much you can save depends on the specifics of your loan, but I’ve seen many scenarios in which the homeowner stands to shave as many as five years off the end of his loan this way.
2. Get a side income and devote it to paying off your mortgage. Many people have passions that are suitable for turning into a side job or business, and these sorts of businesses don’t have to cost much money to start. (See my recent book review of "The $100 Startup" here.)
If you have some spare time and the interest or inclination to do some work on the side, why not take on a side job or start up a side business and devote most or all of your side income to paying your mortgage off early? The thing is, the vast majority of the cash you end up paying toward your mortgage ultimately goes toward interest, so paying big chunks off of your principal mortgage balance early in your loan actually goes quite a long way toward paying off your mortgage early.
If you think you can bring in $250, $500 or even $1,000 from a side business and devote it to paying down your mortgage balance, use Bankrate’s mortgage payoff calculator to see how much mileage it’ll get you toward your personal declaration of independence.
3. Keep great credit. Let’s be real, folks: The best credit most people ever have is the credit they optimize while they’re preparing to apply for a mortgage to buy a home. But the reality is that keeping great credit — all the time — is essential to being able to take advantage of market opportunities to lower your interest rates by striking the refinance iron while it’s hot. Refinancing to reduce your interest rates is a strong mortgage freedom strategy, especially if you can continue to make the payments you were making toward your higher-interest loan, which will allow you to pay your mortgage off early without experiencing any change in your monthly cash outflow.
While we’re on the subject of refinancing, though, it’s also essential to avoid habitually refinancing (due to the fees that end up tacked onto your mortgage balance) and to avoid pulling cash out of your mortgage (via home equity lines of credit, or HELOCs), if you’re looking to accelerate the timetable for your own mortgage independence day.
4. Put yourself on a 15-year payment schedule. There are several options available to you if you want to get extreme and try to achieve your personal mortgage independence day in 15 years, instead of 30. The one that gives you maximum control is to simply plug your mortgage specifics into a calculator, and enter a 15-year term vs. a 30-year term. Then, simply make the higher, 15-year payment, instructing your mortgage company to apply every month’s overage toward the principal balance.
If you’re sure you can afford the higher payments and your loan was originated more than a few years ago, you may want to talk with a local mortgage pro about refinancing into a 15-year loan. The trade-off is that you will be making an obligation to make the higher payment every month, rather than just doing it on your own when you can (and retaining the flexibility to make the lower payment when you have higher expenses or an interruption in income).
In exchange for the obligation to make a higher payment, though, you’ll receive the mortgage-whittling advantage of an even lower mortgage interest rate. Last week, for example, the average rate on a 30-year mortgage was 3.67 — but the average 15-year loan came with an excruciatingly low 2.97 percent interest rate! That differential doesn’t sound like much, but it would save tens — even hundreds! — of thousands of dollars over the life of a loan on an average-priced American home.
5. Round up … WAY up. If your mortgage payment is $1,841, the argument goes, why not pay $1,850? It might have you effortlessly pay off your mortgage a few months early.
But I submit that you should take it to a greater extreme, if your budget allows: Would it really hurt your monthly budget terribly to pay $1,900 or even $2,000? Be honest with yourself: Can you cut down on cable, coffees or coiffures and make it work, without too much turmoil?
Just ask yourself this question: When you think about your mortgage payment in your head, what do you round it up to? At the very least, you should pay that rounded-up amount every month. You’ll be surprised at how quickly it adds up and adds onto the snowball of your mortgage independence!