Mortgages seem like giant a burden that will hang over our heads forever. Many people pay the minimum amount each month and use the rest of their money on expenses or investments. Unfortunately, slowly paying your mortgage off over the entire 30-year term can cost tens of thousands of dollars in interest. Freedom Debt Relief created this guide to help you save that money and pay off your mortgage early.
There are a lot of factors to consider when deciding how much to pay towards your mortgage. To make wise decisions you must understand your own cash flow each month. You also need to have an accurate idea of where you spend your money. A budget is essential to increasing your understanding of your finances. Freedom Debt Relief clears things up with this post.
Many people think since interest rates are reasonably low on mortgages and interest paid is a tax write-off, they are better off investing their money than paying down the principal on the mortgage. Too often, the extra cash not spent on the mortgage ends up being spent irresponsibly. Setting up autopay that includes a little extra cash is a great way to ensure your money is being spent responsibly. Consider it an investment. The quicker you pay down principal, the less interest you pay.
Pay Quicker and with Less Interest
Freedom Debt Relief recommends that those with extra cash available each month consider refinancing a traditional 30-year mortgage into a 15 or 20-year mortgage. Many people wrongly assume a 15-year mortgage means double the payment each month. Mortgage payments are made up of four factors: principal, interest, taxes and insurance. The length of the loan does not change the cost of property tax and homeowner’s insurance. You’ll also pay less interest so the principal will be paid down quicker. In addition, 15 and 20-year mortgage are usually granted a lower interest rate. The payment will be larger but not double and you will save a lot of money in the long run.
Refinancing to a shorter-term mortgage does have shortcomings. You will have less flexibility if an emergency arises and you cannot afford the higher payment. You will also have to pay additional closing costs which can be added to the mortgage. A different option is to just pretend you’ve refinanced and commit to making higher payments. You won’t get the lowered interest rate but if you’re
close to paying off your mortgage it may make sense to simply contribute more each month and avoid extra closing costs.
Advice From Freedom Debt Relief
If you have extra cash laying around each month, Freedom Debt Relief recommends putting more money towards your principal to pay down your mortgage faster. Paying down a mortgage quicker and investing are not mutually exclusive. Set aside a line in your budget each month for mortgage payment and investment.