The amount you have to finance through a mortgage loan and the long-term commitment you’re making to real estate can be pretty overwhelming. With national average mortgage interest rates at 4.30% APY for a 30-year fixed mortgage as of Dec. 22, 2016, homeowners are looking at thousands of dollars in interest payments alone to own housing.
Completing a mortgage payoff early could save you a bundle, plus years of not having a big payment hanging over your head each month, according to Dave Ramsey, financial guru, author and host of “The Dave Ramsey Show.” His organization, Ramsey Solutions, counsels people on getting out of debt by following the Dave Ramsey Baby Steps — the sixth of which is paying off your mortgage early. Ramsey’s other tips include starting an emergency fund, paying off all your debts, building three to six months’ worth of living expenses in savings, investing 15 percent of your household income in a retirement account, funding your child’s college education, and building wealth and giving.
Discover five of Ramsey’s tips on how to pay off your mortgage early — you might be surprised at how many mortgage options you have. Then, get started paying down what is likely your biggest debt so you can be on your way to financial freedom.
1. Refinance Your Mortgage
Low interest rates might make it tempting to stretch out your payments over the course of the entire loan. However, the Dave Ramsey mortgage plan encourages homeowners to aggressively pay off their mortgages early.
One way Ramsey teaches homeowners to pay off their mortgages is by converting your 30-year mortgage into a fixed-rate, 15-year home loan. Not only will you pay off a 15-year mortgage in half the time you’d pay off a 30-year, you’ll pay much less in interest on the 15-year. Once you get into that 15-year-mortgage, increase your payments more, if possible, to pay it off in, say, 10 years. You’ll have more each month even sooner to invest for retirement, save for college or put toward some other goal.
If you make the leap to a 15-year loan, make sure it’s not an adjustable rate mortgage. An ARM typically has a lower rate than a conventional loan, but that rate will change — and it will be in the bank’s favor.
2. Pay More Each Month
When you throw extra money at your monthly mortgage payment, more of each payment after that goes toward your principal balance. Plus, with each extra payment, you’ll be closer to removing private mortgage insurance faster from your loan if you have it. Once your mortgage’s principal balance is 80 percent of the original value of your home, you can request removal of your PMI.
Here’s how extra payments would affect a $220,000, 30-year mortgage with a 4-percent interest rate:
- Make one extra payment each year to shave 11 years and nearly $65,000 off your mortgage.
- Divide your payment by 12 and add that amount to each monthly payment, or pay half of your payment every two weeks. This bi-weekly payment schedule adds up to one extra payment each year, saving you $24,000 and four years off your mortgage.
- If you can’t afford that extra payment, just round up your payments so you’re paying at least a few extra dollars each month, and increase your payment when you get a raise or bonus. That little bit extra will save you from paying more interest than you have to.
If you don’t want to wait to pay off your mortgage, consider selling your home — if you have enough equity in it — and using your profits to buy a smaller, less expensive one. You might be able to pay cash for a new house, and even if you do need to get a mortgage, it will likely be small — and a smaller balance means you can pay it off sooner. In any event, you’ll have successfully reduced your debt.
Ramsey doesn’t recommend that house hunters seek VA loans, which are backed by the Department of Veterans Affairs. They’re more expensive kinds of loans, according to Ramsey, and don’t really qualify as a benefit because you can usually get a conventional loan with lower fees and interest rates. The only advantage of the VA house loan is that you don’t need a down payment, which Ramsey considers a trap.
Ramsey also warns against FHA loans if you’re house hunting; new regulations require all homebuyers with these loans to pay PMI premiums for the life of the loan. PMI costs about $100 a month per $100,000 borrowed, which translates into $36,000 on a 30-year, $100,000 mortgage.
Whatever type of loan you decide on, cut costs wherever you can. You can often save on lender fees because your mortgage company charges for them. Be on the lookout for “junk” fees and know that the loan origination fee typically covers the lender’s cost to process your loan; if you see different mortgage fees for basically the same service, start negotiating.
4. Take Your Lunch
Bringing a brown bag to work every day isn’t exactly glamorous, but it will save you money you can put toward paying down your mortgage — to the tune of $45,000 a year — and enable you to pay it off 11.5 years early, according to Ramsey.
Taking your lunch to work seems like a small sacrifice to not have a mortgage payment. Get creative with your lunches — you might just find you like it better than eating in a restaurant. And you’ll definitely like not having to make a mortgage payment when that day comes.
5. Get the Right Loan
It’s important to get the right loan if you want to pay it off quickly. Some mortgage companies will work with you to build a smart mortgage plan that enables you to reach your goals. Churchill Mortgage, for example, has helped Ramsey fans buy homes. The company promises to look at your budget and find a loan that fits your needs, then helps you build a plan to achieve your goals and keeps in contact with you after the loan closes.