Mortgages

The Smart Way to Pay Off Your Mortgage

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When it comes to debt, I always say the faster you can pay it off, the better. But until recently, not many people thought of a mortgage as debt in the traditional sense. This could partially be due to the fact that most mortgages have a fixed term and a fixed rate, and that a mortgage is such a large sum of money, as well. Plus, if your mortgage consumes a large chunk of your monthly payments, then the thought of paying it off early may just seem ludicrous.

Luckily, there are things you can do to pay off your mortgage faster — without taking a huge hit to your current lifestyle. A few small changes could take years off the life of your loan and help you achieve debt freedom sooner than you ever thought. Sound too good to be true? Read on to learn some of the ways you can pay off your mortgage the smart way.

Make Biweekly Payments

Biweekly payments are a truly amazing thing. By simply splitting your mortgage payment in half and paying that amount every other week, you can take years off the life of your mortgage. This may sound impossible, but it’s true. If you calculate the numbers, you’ll see that biweekly payments have such a strong impact because they cause you to make the equivalent of one extra payment per year, which can add up very quickly since that extra payment goes straight to your principal balance.

And if you’re getting paid biweekly, you can do this with little difference to your budget. Bonus: These aren’t just for mortgage payments, they work on any long-term, structured debt. So if you’re paying off student loans alongside your mortgage then you can apply the same idea to those as well.

Refinance Your Mortgage

It’s no big secret that interest rates are the very thing which cause people to stay in debt for years longer than they intend to. While a mortgage has a fixed repayment term, that doesn’t mean you aren’t losing a ton of money to interest in the same way you would with credit cards. So give your credit score a look and find out if it’s high enough to qualify for a refinance. If approved, you’ll receive a lower interest rate and lower payments.

Now in order to fully benefit from your refinance, the best thing to do would be to keep paying your previous monthly amount due even though your new payments are lower. That way the difference will go straight to your principal balance — with no difference to the budget you’ve already been keeping. That’s a painless way to pay off your mortgage faster and to ease the pain of the long and sometimes fee-ridden process of a refinance.

Utilize Tax Benefits to Pay Off Your Mortgage

One of the great benefits to having a mortgage over other types of debt are the fact that there are so many available tax benefits. Whether as a tax credit or tax deduction, you can definitely benefit from owning a home – and in ways you may not have thought of. Will it take you a little bit longer to do your taxes next year? Yes. Will it be worth it to the tune of potentially thousands of dollars? Yes!

And remember, if your number one goal isn’t just to save money but also pay your mortgage off faster, the best thing you can do is not just benefit from tax breaks, but to then apply your tax refund straight to your mortgage. You can’t beat having a large sum of extra money going straight to your principal balance and knocking months or years off of your loan.

So what kind of things can you deduct? Here’s just a few: mortgage interest, private mortgage insurance if your mortgage was originated in 2007 or after, property tax, home office deduction (only if you can actually prove that you’re working from home), repairs and upgrades for energy efficiency, points paid for mortgage or refinance, home equity debt, some home improvement loans, and even loan prepayment penalties. If you’re not exactly sure which you can qualify for, talk to a financial professional you trust to figure out what you can benefit from and what you need to do to qualify.

Mortgage debt isn’t as destructive as something like credit card debt, but if you can manage to pay your mortgage off faster with relative ease then the money you save could go to goals that are a lot more fun such as retirement, travel, or anything else on your wishlist. And since none of these options require you to dip further into your budget to achieve the savings, then it’s a win/win situation.

Image: iStockphoto

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  • http://www.joetaxpayer.com JoeTaxpayer

    The bi-weekly would reduce a 30 year mortgage to just over 25 years, if the rate were 5%. A great approach for those paid every week or every two weeks.

    I’d suggest they avoid the bank offered deals which have a fee and reduce the savings. A bank or mortgage service company will not always be able to process these payments, anything short of a full payment might get returned. So, for the approach to work – Put aside the half payment every two weeks, and make your full payments as they come due. But you find 1-1/2 payments (or three ‘half payments’) will accumulate twice a year. At that time, mark that additional half payment as ‘extra principal’ and send it in. There’s nothing magic about the this exact amount, if when writing the check you have a bit extra to send in, just do it.

    (Of course, the prepaying you mortgage should always come after paying off any higher interest debt, pay your 12-18% credit cards off before paying your 5-6% mortgage earlier)

    • Gerri Detweiler

      I agree Joe – good tips!

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  • http://www.credit.com/ Credit.com Credit Experts

    If you’re making a decision between paying off a mortgage or paying off credit card debt, it absolutely makes the most sense to focus on paying off the credit card debt first — to do otherwise just doesn’t make smart financial sense, from both a financial perspective and a credit perspective.

    However to clarify on your statements on how paying off a mortgage will impact your credit scores, on the mortgage side of the equation, paying off a mortgage doesn’t hurt your credit scores — at least not in the immediate future. Closed accounts with positive payment histories will remain in your credit reports for ten years before they’ll expire and fall off your credit reports. This means, even though you pay off your mortgage, you’ll still get the credit for having the mortgage tradeline and as long as it’s in your credit report, the account will still be factored into your credit scores. Another factor to consider is that credit scores look at the number of accounts with balances as a factor in the credit score calculation. By paying off a mortgage, you have one less account with a balance — which is good for your scores. Having said all this, both of these factors are less significant factors when it comes to credit scores. Meaning, you don’t need a mortgage loan to earn high credit scores…

  • Kevin O’Connell

    I appreciate the information on the credit score and mortgage payoff relationships. It’s very helpful. As I said earlier, I’ve been through a number of different explanations or supposed equations of a score. If you can have a 700 or higher score without a mortgage, I’m very pleased to hear that. Maybe you can help me with a discussion here. If I’m looking to get a mortgage, lived in a house for 7 years free & clear. I’ve had no housing expense except taxes and utilities. All my revolving accts / installment accounts are R-1, I-1, MC, Visa, auto payments, everything is great and score is still high. What’s the affect, if any, of no mortgage for 7 years. Is it strictly score?

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