Pay off the principal you borrowed more quickly, and you’ll own your home earlier, and pay less in loan interest. You may even save tens of thousands of dollars over the life of the loan. In fact, 32% of homeowners have paid off their home loan.
While there are some drawbacks to paying your loan off early, prepayment penalties aren’t one of them – at least at Pennymac.
So if you’re ready to own your home free and clear, here are some strategies for paying off your loan in less time:
1. Make extra payments whenever possible
Regularly paying your mortgage is good, but making just one extra payment per year to the principal balance can help you pay off your mortgage even faster. You’ll increase the equity of your home, which is based on how much of the principal (outstanding loan balance) you’ve paid off. Plus you’ll also reduce both the outstanding loan balance, and the length of your loan.
Whether you have a 15- or 30-year mortgage, your amortization schedule shows the changes in how principal and interest payments lower your loan balance and the total interest paid over the years. When you make extra payments - whether monthly or periodically - you can reduce your loan amount or interest.
The simplest way to make an additional payment each year, without breaking the bank is adding in Additional Principal to your Pennymac AutoPay. Let’s look at how this would work. You’ll take your monthly payment divided by 12 and put that amount in the Additional Principal Amount when setting up your automatic payment.
Even if you don’t sign up for AutoPay, you can make extra principal payments on a quarterly or semi-annual basis, or anytime you want, just be sure you’re allocating the payment to principal only. You’ll pay down your loan a little quicker, which will result in paying less interest over the loan’s lifetime.
You can even put windfalls into your mortgage. Big tax refund? Most taxpayers do receive a refund, and putting it toward your principal is a solid move for many homeowners. Maybe you receive a year-end bonus? Any amount – large or small – can help reduce your principal owed.
To compare payment plans, and the difference made when you add a little extra, see this Mortgage Calculator.
2. Ensure bonus payments are paying off principal
Be sure you don’t just send in extra money; you’ll want to make sure all the money is applied as an extra principal payment. Go to your online account, and select One-Time Payment. Then choose Principal Reduction, and schedule a date to make the bonus payment.
Or, contact a Pennymac representative about sending and applying a bonus payment (such as that tax refund or year-end bonus), before sending it in.
3. Refinance into a shorter-term loan
If you’ve paid down your loan, or you’ve received a raise at work and are bringing home more each month, then consider taking the next step – refinancing your loan into a shorter-term loan.*
For example, if you’re in a 30-year home loan, investigate Pennymac’s conventional fixed-rate 15-year loan. The monthly payment will be about 50-60% more, as you’re repaying your loan in half the time. But you could also benefit from a slightly lower interest rate, and cut total interest payments in half.
4. Pay down other debts
The quicker you pay off other debts – particularly debts with high interest rates such as credit cards – the more cash you have to pay down mortgage principal.
In fact, you may even consider rolling any high-interest debts into a cash-out refinance; the rates are typically half to one-third the interest rate of a credit card.
If you have more than 20% equity already and an urgent home repair or an emergency comes up that requires cash, consider using either a cash-out refinance or obtaining a home equity line of credit (HELOC) to deal with surprises, versus a high-interest credit card.
As always, ensure that boosting payments and debt repayment options work well with your budget, and any check fees before embarking on any new payment approach.
Use any of these four tips to paying off your mortgage faster and you’ll be on your way to owning your home, payment-free in no time.
*Refinancing your existing loan may result in your total finance charges being higher over the life of your loan.