Most homeowners would love to be able to pay off their mortgage early. However, few see it as a possibility when they take into account their earnings and other bills.
There are, however, a few ways to pay down your mortgage earlier than planned. But first, let’s talk about when it makes sense to try and pay off your mortgage.
When to consider paying off your mortgage early
If you recently got a promotion, have someone move in with you who contributes to paying the bills, or recently got a secondary form of income, you might want to consider making extra payments on your mortgage.
However, having extra money doesn’t always mean you should spend it immediately on your home loan.
First, consider if you have a large enough emergency savings fund. It might be tempting to try and throw any extra money at your mortgage as soon as possible, but there are other financial commitments you should plan for as well.
If you have kids who will be applying to college soon, remember that student aid takes into account their parents’ finances. If your children plan on applying to institutions with high tuition, then your equity will be counted against you.
Refinancing to pay your mortgage early
Refinancing your home loan is one option if you’re considering increasing the payments on your mortgage. If you can refinance a 30-year loan to a 15-year loan with a lower interest rate, you’ll save money in two ways--your lower interest rate and the fact that you’ll be accruing interest for less time.
There is a downside to refinancing. Once you refinance, you’re locked into your new payment amount. So, if your higher income isn’t dependable, it might not make sense to commit to a higher monthly payment that you aren’t sure you’re going to be able to keep paying.
There’s also the matter of refinancing costs. Just like the costs associated with signing on your mortgage, you’ll have to pay closing costs on refinancing. You’ll need to weigh the cost of refinancing against the amount you’ll save on interest over the term of your mortgage to see if it truly makes sense to go through the refinancing process.
Paying more on your current loan
Even if you aren’t sure that refinancing is the best option, there are other ways you can make payments on your mortgage to pay it off years sooner than your term length.
One of the common methods is to simply make thirteen payments each year instead of twelve. To do this, homeowners often use their tax returns or savings to make the thirteenth payment. Over a thirty year mortgage, this could save you over full two years of added interest.
A second option is to make two bi-weekly payments rather than one monthly payment. By making biweekly payments you have the ability to make 26 payments in a year. If you were to just make two payments per month then you would make 24 total payments. Over time, those two extra payments per year add up.
A land contract and a mortgage have a number of similarities. For example, you can use either option to purchase a home Both loans must be repaid on a monthly basis.
Understanding the Differences
A land contract is a legal agreement between a buyer and a seller. Rather than a traditional mortgage scenario with a bank, the seller becomes the lender. The buyer and seller agree on a price for the home then negotiate terms and a payment schedule.
In many cases, these repayment terms follow a schedule of monthly payments much like a mortgage. However, a balloon payment for the remaining balance is often due within three to five years. At that time, you would then obtain a traditional mortgage to fund the remainder that's due.
Land Contract Risks
While it can seem like a land contract would be an ideal way to secure a home, it does involve risks you need to know about. A land contract can be a way for you to close on a home if you aren't able to qualify for a mortgage that covers the full cost right away. The three to five years that a typical land contract lasts can give you time to improve your credit and increase your financial soundness.
Before you agree to a land contract, though, be aware that the property is not yours until you make the final (balloon) payment. This means that if you make any improvements to the property during that time, you could potentially be out of your investment. You are also not building up any equity in the home during the time that the land contract is in effect.
At any point during the land contract, your position as the buyer could be compromised. For example, the seller is the legal owner of the property until the contract has been fully paid. If they experience financial problems and lose the property, you would have no claim to it and would forfeit your payments.
As the buyer, you are obligated to meet your payment agreement. If you don't do so at any time during a land contract, the deal ends. The property stays with the seller and you are out the money you've invested.
Advantages of a Mortgage
With a mortgage, you must pay property taxes and honor your obligations to the lender. As long as you do so -- and avoid liens -- you have legal recognition as the property owner.
A land contract can seem like an attractive alternative if you don't think you qualify for a traditional mortgage. Before agreeing to one, though, be sure you understand the pitfalls that could be involved.
As you enter the home buying process, some people may recommend that you seek mortgage pre-approval. This is typically one of the first steps in the process, and you may view it as something you have little choice over. Yet mortgage pre-approval is not a requirement to start shopping for a house, and it does have a few potential drawbacks to consider. As you make the choice about pre-approval, take time to weigh the pros and cons.
Benefits of Mortgage Pre-Approval
Mortgage pre-approval does two big things for buyers. First, it shows you how much your lender thinks you can afford to spend. This can help point you towards homes that are in your budget. Of course, it’s possible to be approved for more money than your actual budget allows you to spend, but it is a good starting point for budgeting for your home purchase.
Second, mortgage pre-approval gives you strong negotiating power if you make an offer on a home that already has several offers. When a seller sees that you have financing approved, you are a more attractive buyer than someone who does not. There’s always a risk that the seller won’t be able to secure financing, leaving the seller back at the starting gate without a sale.
Drawbacks of Pre-Approval
So if pre-approval strengthens your negotiating position and helps with budgeting, why wouldn’t you want to move forward with it? There are some drawbacks to pre-approval to consider, and the biggest is its impact on your credit rating. Pre-approval requires the lender to pull your credit, and credit pulls do impact your credit rating. If you don’t move forward with the loan using that lender within 120 days, you will need to go through the process again. Multiple credit pulls will lower your credit rating slightly.
A second drawback is the false sense of security that comes with mortgage pre-approval. While most buyers who are pre-approved can get their home loan as outlined in the pre-approval, it’s not a guarantee. It’s possible for mortgage lenders to pre-approve a home loan, only to decide later that the borrower or the home represents too big of a risk. This is a rare occurrence, however. For most buyers, pre-approval is a strong indication that financing will receive approval as well.
Do You Need Mortgage Pre-Approval?
For most buyers, mortgage pre-approval is a good step to take because it provides budgeting guidance and negotiating power. However, it’s not without its drawbacks, and you should understand those as you move forward. To decide the right choice for your needs, discuss your unique buying situation with a qualified real estate agent.
If the thought of getting a mortgage and being in that much debt is stopping you from buying a home, plan to pay it off. Here’s how you can do it in just five to 10 years.
- Live well below your means. If you can keep your mortgage payment to below twenty percent of your take-home pay, you’re on your way. That means that instead of buying a larger house in an upscale community, buy the nicest one you can in the neighborhood you can afford. When you do this, you’ll not only save on the payment but your energy and maintenance costs will be lower, as well.
- Take a 15-year mortgage. Instead of the typical 30-year loan, opt for the 15-year choice. Your payments will be slightly higher, but they won’t be double. Use an online mortgage calculator to see the difference in the payment. You’ll be surprised at how much more affordable cutting the loan length in half can be.
- Use an early mortgage pay-off calculator. Try plugging in different payment amounts to see how quickly you can pay it off. Adding as little as $100 extra each month can massively reduce the years to completion.
- This next idea is easy if you get paid weekly or bi-weekly. Instead of making your mortgage payment once a month, pay half of it every two weeks. Using this trick allows you to make an entire extra payment each year, cutting months and years off your mortgage. If you do it to match your bi-weekly payments, you won’t even notice the additional payment out of your household budget.
Your Agent Can Help
When you’re looking for just the right house to put your plan into action, your knowledgeable real estate agent can find you the perfect one. Let them know what you’re trying to accomplish so that they match you to the right house at the right time.
If you are thinking of refinancing your mortgage, there are so many options available to you that address your needs. Whether you want to do some home improvement projects or provide a down payment for another property refinancing can be a good option for you. There are many different options when it comes to home loans and refinancing. Below, you’ll find some of the most popular choices and what they mean for your mortgage and your finances.
A standard refinances requires that you have a certain amount of equity in your home. If you want to avoid Private Mortgage Insurance (PMI on the refinance, you need 20% equity in the home. Different lenders have different requirements for the amount of equity that you need in order to do this primary refinancing of your home loan. Keep in mind that a good credit score is also a requirement to do this type of loan.
Refinancing With Cash Out
This option is great when you need to take some of the equity out of your home. This way, you can get some of the equity out of your home without selling the house. This way, you’re able to refinance the mortgage, get a good loan term that’s affordable, and borrow a part of the equity you have built up in your home.
You can use the cash that you take out for just about anything you need including college, home renovations, business start-up costs, or to consolidate other debt you have. The only drawback is that you’re not able to borrow 100% of your equity. Usually, the highest percentage you’re eligible to borrow is 80%. The amount is based on both the equity you have built up in your home along with your income. Also, keep in mind that after you take out one of these loans, the amount of equity you have in your home decreases.
Short refinances may not be offered by all lenders. If you don’t qualify for a HARP loan or standard, refinance this could be a good option for you. If you hope to avoid foreclosure and are struggling to pay your mortgage each month, your lender may agree to the terms of this type of loan. The loan is in effect is a combination of a short sale and a refinance. The lender agrees to pay the existing mortgage off. The loan s replaced with a new mortgage. Beware that if you choose this option, your credit score may go down significantly. If you’re able to keep up with the new mortgage payments, you’ll be able to repair your credit score over time.