Financially responsible ways to pay down your mortgage

Learn about smart ways to pay down your mortgage in a way that benefits you the most.

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Financially responsible ways to pay down your mortgage
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Financially responsible ways to pay down your mortgage

So you're interested in a mortgage where you have lower interest rates, an earlier payoff date, and smaller monthly payments. Good news: There are a number of smart and financially sound ways this can be accomplished, according to national mortgage expert, Joe Gross, who launched the "Your Home - Your Future" radio show that talks about various mortgage topics.

"Yes, there are several good options available that can assist you in paying off your mortgage in a responsible manner," says Gross. "But you want to make sure that you choose one that will best fit your particular financial situation."

And although everyone's needs and financial situations differ, there are some facts about paying off your mortgage that apply across the board.

Check out our list of five smart ways to pay off your mortgage, along with reasons why.

Smart Tip #1: Consider if Refinancing is Right for You  

Refinancing could be a smart way to help pay off your mortgage, since some of the benefits of refinancing might include a lower interest rate, which means you could afford to pay off more of your loan in less amount of time.

And Gross says now is a smart time to refinance because interest rates are at a historical low.

Just how low? According to Mortgage News Daily, an organization that provides housing news and analysis, rates were at 3.62 percent as of March 19, 2013.

"If a person is currently paying 6 percent interest on their mortgage, they could get their interest lowered to 4 or 3.5 percent through refinancing," explains Gross. "As a result, their monthly payments will automatically be lower, and they will save money."

[Think refinancing is for you? Click to compare rates from lenders now.]

However, there are a few things you should consider before going through with a refinance, says Gross. "What you need to look at is how much money you will save on a refinance, and based on that, make the decision," he says.

You'll also want to consider refinancing closing costs, which typically will run you about 3 to 6 percent of your amount loan, according to the Federal Reserve's mortgage refinancing guide. And if you can't recoup those costs with the money you save through refinancing, then it's probably not worth it.

Plus, he says, it's also important to look ahead and see how the refinance will affect your future. He warns that although you're saving money, you're also putting years back on your mortgage.

"Say, for example, someone has originally taken out a 30-year mortgage, and when they're down to say eight or nine years into the mortgage, they're going to take a lower interest rate and save money," says Gross. "But they're also going to add again the eight to nine years back, and they're starting over again with the 30. So you really need to consider these things before going through with a refinance."

Smart Tip #2: Make Extra Principal Payments or Change to Bi-weekly Payments

Making extra principal payments might be a good way to pay off your mortgage early, since you'll be paying less in interest overall. The principal payment goes directly toward the money actually owed on your mortgage - whereas a regular monthly mortgage payment goes toward both the principal and interest that is owed.

When you pay down your principal, you'll not only pay off your loan sooner, but you'll also save on interest - since the amount you pay in interest will be calculated based on a lower amount. And just one extra payment a year could help in the long run.

In fact, "If you have a regular job and you're not self-employed, and know exactly what your income is going to be each month, and you have a few extra dollars, I would say it pays to throw in an extra principal payment maybe once a year," says Gross.

But if coming up with the extra money to make that payment seems close to impossible, you may want to consider a bi-weekly payment plan - which has less of a shock on your wallet than just outright making an extra payment.

Here's why: With the bi-weekly plan, you make a mortgage payment every two weeks. So if your monthly mortgage payment is $1,200, for example, you would pay $600 every other week. And since there are 52 weeks in a year, you'll be making 26 payments - or 13 monthly payments - without really realizing it.

With either option, however, be sure to make a note that the extra payment should be going toward your principal. Otherwise, your lender may just put it toward both your principal and interest, which won't help as much in the long run.

So just how much can one extra payment per year pay off? Let's say you owe $200,000 on your 30-year fixed-rate loan which has an interest rate at 4 percent. If you made one extra payment per year, you could own your home four years sooner, and save over $22,000 over the life of the mortgage.

Smart Tip #3: Don't Pay Off Your Mortgage if You Can Get a Higher ROI elsewhere

Drag out your mortgage payments? At first, that might seem downright silly. But, in some circumstances it would be in the homeowner's best interest to not pay off their mortgage quickly.

One circumstance is if other investments will yield a better return, says Gross.

Gross offers an example: Let's say you currently have a mortgage where you're paying 4 percent interest, and it will cost you $50,000 to pay off your mortgage. If you have an investment opportunity that will yield a 6 or 12 percent return, it could be a smart option to invest that $50,000 instead of using it to pay off your mortgage, he says. That's because if you're borrowing at 4 percent and you have the opportunity to see even a 6 percent return on an investment, that's a potential 2 percent gain that could go straight into your pocket (after you pay taxes on it, of course).

Secondly, Gross says not paying off your mortgage quickly could also help lower your tax bracket.

"Right now, there's an interest deduction on your tax returns," says Gross. "So if you use the $50,000 to pay off your mortgage early, you lose the mortgage interest deduction on your taxes."

Smart Tip #4: Make Sure You Have Liquid Assets for Emergencies

Since life can be unpredictable, it's always wise to have available liquid assets - something that can be quickly converted into cash, such as stocks, bonds, treasury bills, and money-market fund shares - as financial backup in the event of an emergency or any other situation that would require ready cash.

And if you're using up your liquid assets to pay down your mortgage faster, you may want to rethink your strategy.

"You always want to have liquid assets," asserts Gross. "Typically I would suggest having at least three months of mortgage payments that are liquid. That's certainly important, because you never know when you might need some emergency cash."

So that means you might want to put the brakes on paying off your mortgage quickly if you're using your liquid assets to do so. If you find yourself in a situation where you have to borrow money in the future, it's highly unlikely that the cost of borrowing the money will be as low as your mortgage interest rate is.

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