You don’t need to go to extreme lengths to pay down your mortgage quickly.
And while it may seem impossible, there are painless ways to pay down your mortgage that won't leave you feeling financially overwhelmed.
In fact, putting a dent in your mortgage doesn’t mean you have to live like a pauper or grind away working overtime. Instead, here are four easy and manageable tips for paying down your mortgage.
Tip #1: For the Most Savings, Make Extra Payments in January
Making extra payments is a tried and true method of paying down your mortgage, but you may not know that there's a certain time of year that gives you the most bang for your buck. And even just one extra payment a year could make a big difference in paying down your mortgage.
"If you are determined to pay down on a mortgage, make an extra payment at the beginning of the year," says Jae Wu, a real estate and mortgage specialist at the real estate company, Heyler. Wu explains that the earlier you pay down in the year, the less interest you accumulate throughout the year.
For example, a $500,000 mortgage with an interest rate of 4.53 percent (the rate as of January 2, 2014 as reported by Freddie Mac), would have a monthly payment of $2,542. By making an extra payment of the same amount at the beginning of the year, you will shorten the loan payoff from 30 years to 26 years.
While four years may not seem like a huge difference, that time translates into big savings. By paying off this home loan four years early, you would save $67,582 in interest.
But where can you find the extra cash each year?
If you receive a year-end bonus, you could contribute that to your extra payment in the beginning of the next year. Another option that coincides with the holiday season is selling any unwanted gifts on Ebay. Or if you go out of town for the holidays, consider renting out your home on a site like Airbnb.com.
No matter how you make that extra payment, it will help you put a dent in your interest and ultimately your mortgage.
Tip #2: Find Out Whether You Can Lower Your Interest Rate by Refinancing
According to Freddie Mac's 2013 Third Quarter Refinance Report, homeowners who refinanced their home loan during the third quarter of 2013 were able to reduce their interest rate by an average of 1.8 percentage points. That's a savings of about 30 percent for individual homeowners.
To see if you could reap similar benefits, it's a good idea to consult your mortgage lender about refinancing. And that's exactly what Truong did.
After eight years of owning her first home, Truong was prompted to speak to her lender when she decided to buy a new home. To help her qualify for another home, her agent suggested that she refinance her first mortgage, a 30- year fixed rate. Once she did, her mortgage rate fell from 7 percent to 3.5 percent, even though she kept the same loan term of 30 years.
According to Truong, her monthly mortgage payments were 40 percent less after refinancing. Refinancing not only lowered her monthly payments, but also lowered her debt-to-income ratio, which helped Truong look financially stable and less of a liability when purchasing her second home.
The refinancing process took about a month, says Truong, and involved filling out and providing a lot of paperwork. But for Truong, it was well worth the effort as it reduced her current mortgage payments by 40 percent, while also helping her qualify for another home.
Tip #3: Get a Mortgage Rebate Check From Your Credit Card's Reward Program
For those of you who don't have credit card debt, Andrew Schrage, financial expert and co-owner of the personal finance website, moneyCrashers.com, recommends using a credit card with cash-back rewards and applying the cash towards your mortgage.
As for how to choose a cash-back credit card, Schrage recommends picking a credit card with cash back features that are most in line with your purchasing habits, such as cash back on gas or groceries. But another financially-savvy option would be to choose a card that offers rewards that could be applied directly to your mortgage.
For example, Citibank offers their members the opportunity to use credit card points earned toward their monthly mortgage payments. Members who redeem their points receive a check issued to their financial lending institution, which they can then send to their lender to help pay for their mortgage each month.
However, he warns, "It's important that you don't carry any credit card debt, because if you do, you are effectively losing money." This is because the annual percentage rate on a credit card is much higher than any cash back rewards rate, says Schrage.
Tip #4: Round Up Your Mortgage Payment
One of the most important tools in personal finance is a budget. Seeing how much is coming in - and how much is going out - can help you keep your money and investments in perspective. But who knew that rounding up your mortgage expenses could help you pay down your mortgage?
J. Money (pen name), the blogger behind budgetsaresexy.com, a popular personal finance blog geared toward 20-somethings, did just that after buying his first home in 2007.
"I don't care for exact, detailed numbers when I'm budgeting," he says. "So, I would round up to the nearest $100 on my mortgage payment."
For example, he explains that if you have a monthly mortgage payment of $1,800, round up and pay $1,900 instead. If you can afford it, you could even round up your payment to $2,000.
"Rounding up is the easiest thing that any average person can do and probably not notice at all," says J. Money. He adds that over time, that extra $100 each month is shaving months and eventually years off your mortgage. "Even if the only thing you ever do is round up, you're still going to be saving money and time in the long run."
The Bottom Line
As you can see, there are very manageable ways to pay down your mortgage early – and they won’t cramp your lifestyle or make too noticeable of a dent in your bank account.
From this list, rounding up your payments is probably the easiest and most hassle-free technique. So start out with that method and see how much you can pay extra each month.
But, for the most savings, refinancing is likely going to be the most-effective savings method, especially if your current interest rate is higher than 5 or 6 percent. You can stand to save a lot by refinacing to a lower rate. And though there's paperwork involved, filling out those forms and working with a lender could be the best way to manageably pay down your mortgage and cut costs.
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