Pay Off Your Home Mortgage
Who doesn’t want to pay off your home mortgage sooner than expected? And if there are ways to make it happen without too much pain…
1. If you have a Home Equity Line of Credit balance, deposit your income there.
This strategy is never mentioned often enough. Perhaps, because it will work only if your home equity line of credit or HELOC has a balance. The credit balance of your transaction account is offset daily against your outstanding line of credit balance, reducing the interest payable on the loan.
Unlike a mortgage with simple interest, HELOCs and credit cards calculate interest on the outstanding balance on a daily basis. Any reduction even for a few days reduces the total interest due.
If you get paid $6,000 a month and those funds sit in your line of credit account for a few extra days per month, you could save a few hundred dollars in interest every year. It doesn’t sound like much, but it all adds up, or “accrues” as they might say in banker lingo. As interest is calculated daily and charged monthly, this can greatly reduce the interest you pay over the life of the loan.
Since a HELOC is a revolving credit line, interest is calculated on your daily balance. Any reduction in the balance such as having your income deposited there reduces the overall cost of the loan. Of course, banks don’t make this widely know as they have no interest in anyone reducing their debt quickly especially if they are making a timely monthly payment.
2. Make an extra mortgage payment each year
To make this strategy easier one can add one twelfth (1/12th) of the normal minimum payment each month. This will lower your outstanding balance progressively throughout the year and similar to the above, will reduce the total amount of interest you pay. This is almost identical to making bi-weekly mortgage payments without the admin fee that most lenders or plan administrators charge.
This works best with a regular amortizing simple interest mortgage (fixed or adjustable), but can be used to pay down a HELOC too.
3. Deposit lump sums into your mortgage account
Pay any unexpected lump sums such as bonuses and tax returns, gifts or inheritances into your mortgage account. This can save thousands in interest and cut years off your home loan. Depending on your overall financial picture there may more strategic uses for some or all of the monies received rather than paying down your mortgage. Check with your adviser.
4. Maintain your payments when rates are lowered through a refinancing
Keep your mortgage payments at the same level as you were paying before the mortgage interest rate reduction. Again, you won’t even know you’re missing that little bit extra and you will cut years off your loan term and save thousands in interest.
This strategy works well if you want some flexibility and refi with a 30 year amortization as opposed to refinancing into a 15 or 20 year amortizing loan.
Are you using any other innovative methods to prepay your mortgage to reduce your total debt? Let us know!