Homeowners are eager to settle their mortgage loans early, with reasons ranging from slashing interest payments to eliminating the psychological pressure of debts. For one retiree, settling a home loan ahead of time can increase cash flow, especially when transitioning to a fixed income. Despite your reasons for settling your mortgage ahead of time, it’ll be the best way to lower the amount of interest you’d pay on your loan.
It can be massive savings. Below are payoff strategies to help you settle debts early.
5 Ways to Settle Mortgage Early
Make an Extra Monthly Payment
You can find different ways to make extra payments to shorten the payoff process, like:
- Extra monthly payments
- Bi-weekly loan payments
First, split your monthly payment in half and make biweekly payments. It’ll be equivalent to 13 months of mortgage payments instead of 12, saving a bundle in interest. It can be an excellent strategy for others because it’s barely affecting their monthly budget. Talk to a service provider to verify whether they accept bi-weekly payments. If not, you’ll have to decide on setting aside bi-weekly payments and lump them into a single payment.
Your second approach is paying extra against the monthly principal or making an extra principal-only payment annually. It’ll save you thousands of dollars in interest over your loan’s duration. Talk to a residential and commercial conveyancing company if you go with this. If you can’t settle the loan early, you won’t have to pay additional charges.
Make sure to ask your lender if they’ll sort your payments in the correct way to reduce the principal, not repay the interest. You’ll also have to ask them if they understand the extra payment isn’t for the next month’s mortgage payment.
Think About Recasting Your Loan
Mortgage recasting isn’t anything like refinancing. That’s because you pay a lump sum towards the principal and keep your existing loan before the lender adjusts your current amortization schedule to reflect the new balance. It’ll lower your monthly mortgage, but it’ll not affect the interest rate and loan term. Usually, mortgage recasting prices are lower than refinancing.
You can opt to keep your low-interest rates. On the other hand, refinancing might be your only option if your interest rate is high.
Try to Ask for Loan Modifications
Most homeowners have to deal with high-interest rates and unaffordable options that they can’t afford, making it challenging to get back on track and settle it early. If that happens, you can try applying for loan modifications. Loan modifications are an excellent choice for applications experiencing financial problems. That’s because it entails lenders adjusting the loan terms and interest rates to current charges.
Opting for this option will save on the interest and pay it off earlier. But it might affect your credit profile and score, depending on how the lender reports it to credit companies. Make sure to walk this matter with your lender beforehand.
Make Lump-Sum Loan Payments
One alternative to recasting is making lump-sum payments to your principal if you get an unexpected cash flow and financial windfall. It can refer to funds earned from selling your belongings, an inheritance, tax refund, or bonus at work. Unfortunately, you can’t recast FHA and VA loans. However, making lump-sum payments might be an excellent choice for borrowers with these loans. You’ll save yourself the lender’s fee for recasting.
You’ll have to specify that they should put your excess payments on the principal. Make it your habit to talk to a lender if you’re unsure how they’ll sort lump-sum payments.
Think About Refinancing the Loan
Mortgage refinancing will only make sense if you shorten the loan term or get a lower interest rate. Be cautious because you might have to pay for the charges related to refinancing, so ensure your savings outweigh the costs. Opting for a shorter term, like replacing a 30-year mortgage with a 15-year mortgage, will help lower the interest rates while paving the way to early payoff.
But your monthly payments might be higher with a shorter term, which can stretch your budget too thin. You might have to weigh your options thoroughly.
Can I Pay Off My Mortgage Early?
You can settle your mortgage early without paying the fines, but you have many factors to consider before doing that. Firstly, reach out to your lender to ask if your mortgage has a pre-payment penalty. If it does, they might charge you if you settle your mortgage earlier than agreed. It’ll determine if your decision is financially possible for you. Then, it’s best to ensure there are no limits on when and how you can make extra payments.
Other loans have restrictions that will encourage you to follow the schedule. It’ll also be best to ensure that your extra payment goes to the principal and not interest.
You’ll save thousands on your loan’s interest if you have the financial resources to settle your mortgage earlier than agreed. However, you might want to educate yourself about the factors that will affect your plan of paying the mortgage off early to avoid mistakes.