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Tips to Pay Off Your Mortgage Early
In a macroeconomic environment that is full of insecurity, home owners have a special responsibility and opportunity. Although it is true that many people found their houses to be a financial burden during the thick of the 2008 worldwide crisis, those that were able to stay on top of their payments actually found that their real estate was more of an asset than ever before.
It behooves the smart home owner to find ways to pay off a mortgage as early as possible in times of economic volatility. In a situation where a house is paid off or at least has some positive equity in it, the real estate can serve as an added buffer against any other financial troubles that a home owner may face.
Below are just a few of the best tried and true ways to pay off a mortgage early, improving your current financial standing and your long term credit score as well as your leverage for business and retirement.
Shorten The Loan Term
Shorten the time frame of the loan with your financial institution. No matter what other conditions are in your financial contract with your financial institution, shortening the time frame will almost always help your chances of paying off your loan early. Not only will a shorter time frame allow less interest on the loan to accrue, but it also tends to focus the efforts of the individual who is paying off the loan to fit within the structure that he or she has set for the transaction.
If you notice, the foxed interest rate for 15 year mortgage loans is usually much lower than the 30 year fixed interest rate for any given piece of real estate. In some cases, the difference in interest rates can reach above a full percentage point. A quick calculation on any of the free mortgage calculators around the Internet will show you that you can literally save hundreds of thousands of dollars simply by taking this one tip to heart.
Most banks consider individuals who take on a shorter time frame much less of a risk than those who take a conventional 30 year mortgage loan. They assume that you must have some extra funds available; they are therefore much more likely to offer you better interest rates as well as deals that you simply may not get if you only consider the norm. If you have not yet settled on a financial institution to bankroll your real estate purchase, try negotiating with bankers based on a 15 year mortgage plan rather than a 30 year mortgage plan. The respect and the benefits that they will offer you may surprise you, especially if they know that you have not yet committed yourself to a bank yet.
The downside to this strategy is that the payments for a 15 year fixed rate mortgage will always be substantially higher because of the shorter time frame. However, with proper budgeting and a few renegotiation techniques (some of which are discussed in this article), most home owners are actually able to save themselves this money despite their best efforts to convince themselves otherwise.
First of all, make sure that you did not sign a contract that penalizes you for paying off your house early. If you have yet to sign the documents that solidify the terms of your loan with your financial institution, make sure that this provision is not included in the wording. This can be tricky; a reputable real estate lawyer without ties to your financial institution should be consulted in order to make sure that this is the case. If you have already signed financial documents with this early bird provision, you should do your absolute best to renegotiate your agreement so that it is taken out.
In many cases, a financial institution will negotiate an early bird payoff clause out of a real estate agreement in exchange for a higher interest rate on the loan. Although they believe that they will be getting more money out of you because of this, you can turn the tables on them if you wait to renegotiate until you have enough money to pay off your mortgage early, thereby shortening the time frame that the interest has to accumulate on your loan. Under no circumstances should you let your bank know that you have additional funds to pay off your loan early if you are trying to renegotiate an early bird clause out of your financial contract. Keep that extra money in another financial institution.
Pay your mortgage biweekly instead of monthly. More frequent payments means less time for interest to accrue on the principal balance of a loan. Alone, taking this tip into account can save you tens of thousands of dollars on the purchase of an average piece of real estate. Combined with a short time frame, a home owner can save six digits easily.
Biweekly payments are also considered less risky to a banker than monthly payments. The more often that a banker receives money from you, the happier that he or she will be. Keep in mind that the immediacy of money has a value that is just as important, if not more, than the face value of that money. If your bank receives your money two weeks in advance for the life of your loan, then they can begin earning interest on that money and investing it two weeks earlier. Accrued over the lifetime of a mortgage loan, this adds up to a considerable profit for a bank. You should have this knowledge on hand when they try to distract you by saying that receiving your money more quickly does them no good, as many bankers will. If you are paying off your mortgage in a biweekly fashion rather than monthly, then you have a great deal of leverage when it comes to negotiating a fixed interest rate that is at the bottom of the range that your banker gives you for your credit score.
Refinance at a Lower Rate
If you have the chance, refinance. However, make sure that it is advantageous to you to do so. Contrary to popular belief, refinancing is not always to the advantage of the home owner. If you are in a good position (your payments have been made on time and your house has positive equity), then you owe it to yourself to research the benefits of refinancing with your financial institution at a time that is convenient to you, not them.
As this article is written, both variable as well as fixed rate mortgage interest rates around the industrial First World are at all time lows based on the actions of the Federal Reserve or central banks in those countries. However, this nearly free money will not last. At some point, the central banks will have to inflate the currency in order to avoid other financial problems that are sure to occur with the quantitative easing that has been occurring in response to the dual housing and banking crises of 2008. Although there are many people who can make a good educated guess, the actions of the central banks in these countries are not regulated by any governmental body. Basically, they can change the interest rate whenever they want.
Because the interest rate is not in your hands, you should consult a highly reputable and trusted financial expert before you undertake any sort of variable refinancing plan. Fixed rate refinancing is safer because the rate is locked in no matter what happens to the outside economy.
If, after consulting with a legal, financial, real estate and accounting professional you believe that interest rates will remain where they are within the time frame that you plan to pay back your loan to your bank, then you may safely consider a variable rate refinance. This will allow you to take advantage of the absolute lowest interest rates that are available on the market, as the variable interest rates are always lower than fixed interest rates on a piece of real estate, all else being equal.
If, after the same consultations, you believe that interest rates will rise significantly within the time frame that you plan to pay off your loan to your financial institution, then you should renegotiate a fixed rate mortgage with your bank - but only if you determine with your team that you will actually be paying less money overall for your house. Banks have armies of lawyers and accountants working on their side for one reason: to increase their profits. The process is much more complex than simply looking at an interest rate number. Be sure to consult your team before making a final decision on a renegotiation. Remember that you can incorporate quicker payments or bigger payments at any time in order to save money and pay back a loan more quickly.
Variable Interest Rate Considerations
Consider variable rates if you have a timeline to pay your house off completely before a shift in the economic climate. As mentioned before, variable interest rates provide a home owner with a good team and a personal handle on the economy the ability to save even more money on the purchase of a home. Therefore, under the correct circumstances, a variable rate purchase or renegotiation should definitely be considered.
This tip deserves its own subheading because of the evil rap that the variable rate gets. Variable rates are not evil in and of themselves; home owners simply get themselves in trouble by focusing only on the low interest rate rather than the plan to actually pay back the loan before the bank raises the rate or the market changes cause an increase in the monthly payments of a home owner.
In order to take full advantage of a variable rate, a home owner should have a definite time line for paying back a home loan. This timeline should usually be shorter than 15 years. This will usually require a great deal of additional capital that is stowed away specifically for the purpose of paying back the home loan. Only under these circumstances should a variable loan be seriously considered; however, it is a great way to save a large amount of money on a home loan.
Leverage Income Tax Refunds
Use any tax refunds that you receive to pay off the debt more quickly. Tax refunds can certainly be repurposed in order to pay off your mortgage more quickly. On top of that, the mortgage deduction will help to reduce your tax burden for the following year as well.
Many banks actually have programs that offer additional incentives for home owners who are willing to immediately repurpose their tax refund back into the bank in order to pay back a mortgage loan. Be sure to ask about and take advantage of any financial institutions that offer these kinds of benefits, and be sure to ask if you are still in the negotiation stage.
Budget for Other Extra Payments
Budget more money every month with each payment to make sure that you are paying the principal off as well as interest. Make sure that these extra payments are going towards the principal on the house if at all possible. Although making larger payments every month is one way to definitely decrease the amount of time that you take to pay off a home loan, the way that money is purposed is just as important as the money itself. To be most effective, any extra payments that are made each month or biweekly should be directed towards the principal on the home loan rather than the interest.
The reason that banks are able to make nearly $200,000 on a $500,000 home loan in a 30 year period is because of the way that interest and principal payments are structured within the average contract that is signed by a borrower. The first few years that a home owner pays his or her mortgage payment, he or she is paying almost strictly interest. This means that the underlying principal on the home is still there accruing more interest that must be paid off as well as the interest that is being paid currently. However, if a home owner repurposed that same money that was paying off the interest to the principal, the bank would not be able to take advantage of this little scheme.
Unless you have a great deal of leverage within a financial institution, you will probably not be able to negotiate a new schedule of interest vs principal payments. However, under no circumstances should you accept a financial arrangement that causes any money that you pay above and beyond the minimum monthly (or biweekly) mortgage payment to the interest on the loan. That money should be directed towards the principal, and if you are in good financial shape, you can hold out for a bank that allows this type of arrangement.
Be incredibly wary as well of interest only loans. Interest only loans take the interest vs principal scheduling scheme of the banks to a heightened level, creating a situation where a home owner is paying back virtually none of the principal for the majority of the time that he or she is paying off the loan. Banks try to hide these arrangements behind too good to be true interest rates. Remember that you want to pay off the principal as well as the interest and do not allow yourself to be enticed by a low interest rate or other goodies that leave the principal of the home loan there to invisibly suck your pockets dry while you pay your money into a black hole of interest and fees.
Monitor & Improve Your Credit Score
If your credit score changes significantly to your advantage, you can always try to renegotiate with your lending institution based on this new information. Before you first go into the office of a banking agent to get a home loan, you should check your credit score for mistakes and attempt to correct them. Like it or not, many banks will offer different tiers of interest rates based solely on the credit score that you have when you first walk in the door. It behooves you to make sure that this initial impression is as good as it can be.
Although there are three major credit reporting companies, all of whom use completely different methods to calculate a credit score, you never know which one a bank will use in relation to you. Credit scores are known to vary wildly between companies, and there is nothing that says that a bank cannot take the lowest of those scores as a justification to charge you a higher interest rate when you come in for a home loan. For this reason, get your free credit report from all three agencies, Experian, TransUnion and Equifax, and compare the scores for discrepancies.
Should you find an extremely large difference between the scores on your three credit reports, or should you find charges on your accounts or other potential fraud on any of the three reports, consult a reputable financial professional in order to get these problems fixed before entering a negotiation with bankers or a renegotiation for financing on your own behalf. Fixing a credit score is a long process and will likely require a great deal of your own time even with the assistance of a financial professional. Many companies that claim to be able to fix your credit score instantaneously are simply too good to be true. Stay away from companies that employ sketchy methods such as tampering with your social security number in order to fix your credit. These methods usually just end up causing many more problems than they solve.
If you have already made your real estate purchase, do not be afraid to have your credit scores fixed and then enter a renegotiation with your bank. They will renegotiate if they sense that you may try to move your loan to another bank and you have been a good customer so far. If you have made all of your payments, banks certainly do not want to lose out on the interest that your loan is generating. They will usually be open to negotiation in order to keep your business when your credit score improves.
Keep in mind that you may have to leverage your position in order to get a positive response out of a bank. You will need to keep records of the financial institutions that you have been to and what they are offering you because of your improved credit score. You will need to show hard evidence that you can get a better deal elsewhere and show that you are perfectly willing to make the move. In order to do this seriously, you must consider the short term fees that are always imposed with a move such as this and be ready to pay them. You can also make an issue out of the fact that you have extra money saved up in order to pay off your loan early.
Bringing it All Together
In short, keep yourself in good standing by paying your home loan on time every month. Solidify your record within your current bank if you have already signed financial documents and put your best financial foot forward if you have yet to choose a bank for your mortgage. Keep abreast of the market as a whole and make sure that your banker knows that you know he is not the only game in town. You must make them work in order to keep your business and you must make sure that your business is worth keeping. Keep these tips in mind and you are sure to find a great deal when it comes to renegotiating your mortage or getting a great home loan contract so that you can pay off your home loan as quickly as possible.
Key Tips & Advice
Things to consider when buying a home:
- While the 30-year mortgage is the most popular term in the United States, a 15-year term builds equity much quicker;
- Home buyers in the US move on average of once every 5 to 7 years;
- Early mortgage payments apply primarily to interest rather than the principal;
- Using a shorter loan term, paying extra & making bi-weekly payments can better help offset any transaction-based expenses.
Do Home Prices Always Go Up?
In the United States real estate prices have went up about 6-fold since 1970.
Our monetary policy is biased toward inflation. If you back out general inflation, outside of during market bubbles, real estate typically performs roughly inline with general inflation. Rather than looking at raw prices, better metrics to use for analyzing real estate prices are:
- Home price vs median income.
- Purchase price vs rent.