There are several ways to pay off your mortgage faster.
If you buy a home now, it could take up to 13.5 years to pay off your purchase, according to new data from Zillow. “The combination of rising home prices and high mortgage rates results in a longer time between buying and selling before a profit can be made,” says Nicole Bachaud, senior economist at Zillow. And she tells us that the high upfront costs of buying a home could also cause buyers to opt for a lower down payment, extending the time it takes for buyers to turn a profit on their home.
According to Bachaud, these are estimates of how the percentages (and maintenance costs) may affect the profit schedule:
· A 3% deposit would require 13 years and six months to make a profit
· A 5% deposit would require 13 years and three months to make a profit
· A 10% deposit would require 12 years and seven months to make a profit
· A 20% down payment would require 11 years and three months to make a profit
However, it is possible to break up even earlier.
Bi-weekly payments
One way to pay off your mortgage faster is to make biweekly payments. Brandon Snow, executive director of mortgage strategy at Home Allyunderlines a recent TikTok video which went viral explaining a “mortgage payment hack” for homeowners.
“According to the video, if you make bi-weekly mortgage payments instead of monthly, you’ll save on average about 5 years off your loan amount,” Snow tells us.
According to Matt Vernon, head of consumer lending at Bank of America, “Making fortnightly payments on your mortgage can speed up repayment, potentially saving on interest and shortening the life of the loan. » If you make half your monthly payment every two weeks, he tells us you’ll end up making an extra payment every year. “Over time, this additional payment can significantly reduce the total interest paid and shorten the life of the loan.”
However, the actual impact may depend on other factors, such as your interest rate. “If your interest rate is higher, the savings from biweekly payments will likely be greater,” Vernon says. “Plus, if your mortgage has a fixed interest rate, the impact is more predictable than variable rate mortgages. »
Biweekly payments can reduce interest and shorten the life of the loan.
So how does this strategy translate into real amounts? Snow gave me two different scenarios using a $332,800 mortgage (based on Federal Reserve housing price estimates for the second quarter of 2023), assuming a 20% down payment.
“At a 3.5% interest rate over a 30-year mortgage term, a homeowner’s monthly payment is $1,494 in principal and interest (escrow not included),” Snow says. “So if the buyer upgrades to an accelerated bi-weekly payment plan, they will pay off their mortgage in 26.2 years at $747 per payment, saving them approximately $30,000 in interest on the term of the loan.”
However, given that current interest rates are higher, here is another scenario:
“At a 7% interest rate over a 30-year mortgage term, a homeowner’s monthly payment is $2,214 in principal and interest (escrow not included),” Snow says. And by switching to an accelerated payment plan every two weeks, he says the homeowner would pay off their mortgage in 23.7 years at $1,107 per payment, saving them about $115,000 in savings. interest over the life of the loan.
Not always the best strategy
But whether this is a good strategy or not depends on several factors. For example, if your mortgage rate is lower than your savings account rate (and Snow says that’s the case for many people who bought their homes before 2022), you may want to keep your mortgage payment schedule usual monthly. “With a biweekly payment schedule, you end up making a few extra payments per year, but consider investing the funds that would go toward those extra payments in a high-yield savings account,” he advises.
On the other hand, if your mortgage rate is higher than your savings account rate, Snow admits that making biweekly mortgage payments can help pay down principal faster and accrue less interest. “However, not all lenders offer this option, and some may charge a fee to set up the new payment schedule, so be sure to research your lender’s policies before changing your payment schedule,” says -he.
Vernon agrees that you need to know your bank’s policy and whether they will impose prepayment penalties. “It’s important to check with your mortgage lender to make sure they accept part payments and to confirm how they apply them. » Additionally, before changing your payment schedule, he recommends that you consider your overall financial situation and determine if this new payment strategy fits your goals and budget.
Other ways to pay off your mortgage faster
Instead of making biweekly mortgage payments, Melissa Cohnregional vice president at William Raveis Mortgage, tells us you can simply make an additional payment every year, because it will have the same effect.
“For any mortgage, if you make payments above the required payment, the additional amount will be used to reduce the principal,” she explains. “As the principal amount decreases, each future monthly payment further accelerates the amortization of the principal amount.” And that creates a snowball effect that allows you to pay off the house a few years early.
If you generally don’t have money in your bank account that can be used for this purpose (37% of Americans can’t cover a $400 emergency expense, according to the federal government), it may be easier to ‘use your income tax check when you receive it.
Rounding up payments is another way to pay off your mortgage faster. For example, if your monthly payment is $2,500, consider paying $2,700.
“Also explore refinancing options, allocate bonuses to your mortgage, and automate payments while reviewing and reducing expenses to redirect your savings toward repayment,” says Vernon. However, he reiterates the importance of checking with your lender to understand terms and potential penalties before implementing new mortgage repayment strategies.
The one-owner strategy
I also spoke with Stephanie Mickelson, freelance writer in Eau Claire, Wisconsin. She and her husband purchased their first home in June 2023, after saving and planning for about 10 years. Their goal is to pay off the house within 5 years. Mickelson recommends having the largest down payment possible. “We put 30% down on our house, which significantly reduced our monthly payments,” she says. “So instead of making larger payments on a large loan, we were able to get a smaller mortgage, allowing us to pay more on the principal.” »
To save for the down payment — and pay off the house as quickly as possible — Mickelson’s husband went from part-time work to full-time work and management. And because Michelson is a stay-at-home mom, she writes early in the morning before the kids get up. “I find as many jobs and clients as possible, and my husband also strives to earn more.”
Don’t dip into your emergency fund.
They also make extra payments to pay off the mortgage. However, Mickelson says the money doesn’t come from savings. “When we got out of debt in 2015, we set aside a six-month emergency fund, and we don’t touch it unless there’s an emergency that we can’t cover with our normal budget. ” The family also has another savings account for home maintenance, unexpected expenses, etc. “This allows us to put as much money as possible on the loan without putting ourselves in financial danger,” she explains.
Mickelson also avoided a common mistake when buying a first home. “When we were deciding whether to take out a mortgage, I looked at the actual interest we would pay over a 15-year period,” she explains. If the mortgage is paid off in 15 years, it will include approximately $111,000 in interest. “Our plan is to pay it off in less than 5 years, and in this scenario we will pay just under $40,000 in interest and save $71,000.”