Reducing the Years on Your 30-Year Mortgage
Owning a home may be your dream, but the task involves a lot of work.
Owning a home may be your dream, but the task involves a lot of work. From finding the right piece of real estate to issuing a down payment, there are several steps involved before you are even handed the keys. Then comes the intimidating and most daunting part of the entire process: paying off a mortgage every month for the next 30 years.
There are ways to speed that final process up. Accelerating the schedule on a mortgage takes detailed planning, but it can be worth it in the long run. The process isn't for everyone, as it involves more up-front charges to pay off the loan you took out from a lending agency. However, if you are able to afford it, reducing the years on a mortgage agreement may be a worthwhile plan.
Pay a little extra
While there is not one specific strategy required to reducing a mortgage, all of the options presented to mortgage borrowers have a common thread: they involve a great amount of planning. In order to successfully reduce the years on your mortgage payment, you need to be able to think several years out and account for the changes to your personal finances.
Bankrate stated that the most common way homeowners look to cut down on mortgage payments is by paying extra every month. Instead of writing a check for the agreed-to amount, paying more than that will reduce what you owe overall. Make sure that the extra spending is going towards the principal payment of your home purchase and not covering the interest expenses. The lower your principal gets, the less interest you will need to cover later on.
In order to do this, you must be sure that you can afford the extra payments every month. Even spending $100 more than you need every month for an entire year will go a long way in taking some debt off the back end of a 30-year mortgage.
Refinancing has its advantages
Another option available for homeowners is refinancing, turning your 30-year home mortgage into a 15- or 20-year plan. Similar to paying extra, the pros of a refinanced loan are that it takes years off the contract. The cons are similar as well, however, because a new plan involves paying more every month than you did in the past.
With a refinanced mortgage, loans are paid off on an accelerated schedule , Forbes explained. Paying off the principal every month means less to pay in interest later on. Additionally, 15- and 20-year mortgage plans generally have lower interest rates than 30-year plans, so you may end up saving money by opting to refinance.
Understanding the differences
Paying extra and refinancing are similar overall, but have their differences. A refinanced loan has better interest rates, but offers less flexibility, as you will be locked into a higher rate every month. Paying extra gives you the freedom to choose what you want to pay off, but will likely not reduce as many years off the mortgage.