Owning a home is a significant milestone in the journey toward the American dream. Far from being the dreaded 'bad debt,' mortgages are a powerful tool, often seen as 'good debt.' They offer a pathway to enhance your net worth and lay the foundations of a solid financial future for your family. For those looking to fast-track this journey, there are savvy ways to get ahead on your mortgage.
Accelerating your mortgage payments and settling the debt ahead of schedule can lead to substantial savings on interest. Still, it also means you may lose some benefits, such as tax advantages and liquidity.
Each person’s situation is unique. Some may prefer to keep their mortgage for the tax write-off or to maintain more liquidity. But if you’d rather reduce your total payout, lower your monthly expenses, and own your home free and clear, here are some strategies that can accomplish this:
Extra Payments: Small Steps, Big Impact
No matter how small, every additional payment chips away at the principal and moves you closer to a mortgage-free life.
Are you expecting a windfall, such as a bonus, tax refund, or inheritance? Have you recently eliminated other financial responsibilities like a car loan or your child’s college tuition? Did you get a pay increase at work? Would you consider adjusting your monthly budget to rein in frivolous spending? Even rounding up your mortgage payments to the nearest hundred or nearest thousand is a small adjustment that can make a difference.
The cumulative effect of making extra payments is remarkable—less interest paid over the loan's lifespan and a shorter road to outright homeownership. For example, let’s say you have 20 years remaining on a 30-year $450,000 mortgage at 5%. If you pay an extra $250 per month, you will pay off the loan 2 years and 11 months early and save $35,493 in interest. Adding as little as $100 extra monthly would save you 15 months of mortgage payments and $15,847.
Biweekly Payments: A Simple Twist with Big Rewards
Switching to biweekly payments is a smart tactic that can help you pay off your mortgage faster with little impact on your monthly cash flow. Even if you don’t pay more monthly, breaking the amount into smaller payments more frequently will help you get ahead.
This strategy works because by making half your monthly mortgage payment every two weeks, you effectively make one extra payment each year. If your mortgage payment is $2,000 per month and you make 12 monthly payments yearly, you’ve paid $24,000 at the end of the year. However, a year has 52 weeks. So, if you pay half the monthly payment every two weeks, you’ll make 26 payments of $1,000 each, or $26,000 per year. The extra payment will go entirely toward the principal (be sure to confirm with your mortgage company that this is how it will be applied), and you will pay less interest over the loan’s term.
Over time, the compounding effect is significant, helping you shave years off your mortgage term and reducing the total interest paid. Let’s say your principal loan balance is $450,000 with a 5% interest rate and 30-year amortization schedule. With biweekly payments, you’ll save nearly $80,000 in interest and pay the loan off four years early.
Refinancing: A Tactical Move
Refinancing your mortgage can be a game-changer, but it's not a one-size-fits-all solution. Homeowners can lose money or fall into more debt through refinancing if they’re not careful. High closing costs might mean it takes too long to break even, even if your monthly payments are lower. If there’s a chance you’ll be moving within the next few years, you may never recoup the loan cost. And if a higher monthly payment would stretch your budget, you may be better off paying more on your existing loan when you have the funds rather than being locked into a higher monthly payment.
However, strategic refinancing can work to your advantage. Explore your options and keep your eyes open. If the market shifts in your favor, you may want to jump on the opportunity to get a shorter loan term or secure a lower interest rate.
Seeking Professional Advice: Navigate with Confidence
Consulting a financial advisor, such as those at Voice Wealth Management, can be invaluable in mapping out your mortgage payoff plan. A skilled financial advisor can provide personalized strategies tailored to your unique circumstances while helping you avoid potential pitfalls.
Should paying off your mortgage be a focus right now, or would you be better served by pursuing a different goal? Is your emergency fund insufficient? Are you falling short of your retirement account targets? Are you holding higher-interest debt, such as credit cards or car loans? Would you benefit from the mortgage interest tax deduction? These are just a few of the questions you may need to answer before deciding. Your advisor’s insight can help you make decisions that suit your current financial capacity and setting the stage for long-term wealth building.
Russell D. Rivera, CFA, CFP® is the Founder and President of Voice Wealth Management (Voice) in New York, NY. He also likes to think of himself as a Personal CFO and Financial “Therapist” for entrepreneurs, young professionals, and their families. He helps clients make prudent financial decisions regarding spending, saving, investing, and planning while giving a voice to the individual client's financial priorities and experiences.
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
Neither LPL Financial nor Voice Wealth Management, offer mortgage services.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.