5 Tips to Become Mortgage Free Quicker
By JD Esajian on March 1, 2019
The goal for most property owners is to pay their loan off as quickly as possible. The sooner you can eliminate a mortgage payment, the better your overall financial situation will be. This is the case if you are talking about a primary residence, and especially when it comes to a rental property. Owning a rental property free and clear allows you to generate large amounts of cash flow, which can be used to pay down debt, grow your portfolio or fund your retirement. Getting to that point is not as difficult as you think. With a little bit of savvy, and a lot of discipline you can start paying down your mortgage today. The quicker you start the sooner you will be mortgage free. Here are five tips to help become mortgage free quicker.
- Consider Bi-Weekly Payments. It is no secret that the key to paying down any debt is increasing the number of payments. With a mortgage most lenders give you the option of making a bimonthly payment. This doesn’t sound like a big deal, but it has a significant impact. With a bimonthly payment you end up making more payments throughout the year. With a bimonthly payment it works out to an additional two payments a year. If those payments are to the principal, you directly reduce your balance owed. You don’t need a financial calculator or amortization schedule to see the impact of an extra payment. There are many apps available where you can see an updated amortization schedule and where you stand at all times. You can play around with extra payments, payment amounts and number of payments per year. If you do nothing else, you should consider switching from a monthly payment to a bimonthly option.
- Extra Payments. A bimonthly option is a great way of knocking down principal, without even knowing it. Another option is to plan on making one extra mortgage payment every year. As simple as it sounds, by saving money every month and making an extra payment at the end of the year will greatly reduce your balance owed. On a 30-year loan, one additional payment can knock seven years off your loan term. The impact on a 15 year isn’t nearly as great, but you can still shave almost two years off the term. With the interest associated this equates to tens, if not hundreds, of thousands of dollars. Most investors can find funds to make this extra payment, whether it is from a tax refund, cash flow from a rental or simply surplus savings. The key is to make sure that the extra payment goes to your principal. Principal reduction is what accelerates the pay off. If the payment goes towards the interest, or is an extra payment, it won’t have nearly the same impact.
- Additional Down Payment. There are several schools of thought as to how to best use your capital. In a perfect world all money should be used to make more money. Earning interest on capital, either through traditional interest or investments, is the key to true wealth. However, this isn’t always possible. A great way to guarantee that your money is put to good use is to increase your down payment. The more money you put down on a purchase the lower your monthly payment will be and the less that is owed. Every time you put additional money towards the principal you eat away at the loan balance. Putting 25% on a purchase is certainly a significant chunk, but 50% can cut years off the loan. This splits the difference between paying cash for the property and putting down as little as possible.
- Look For Shorter Terms. Thirty years is a very long time. Even if you start investing in your 20’s, by the time you pay off your loan you will be in your 50’s. You want to be able to enjoy the fruits of your labor while you still can. There are a few different options when it comes to choosing the best loan term. If you are disciplined with your money you may be able to get away with a 30-year term, making extra payments every year. If you want the security of knowing you have a shorter loan term you can simply take a shorter loan. This puts you on the hook for a higher payment every month, but it also means you can own the house free and clear that much quicker. You can always make an extra payment, but with a 15- or 20-year loan you may not have to.
- Keep a Low Debt Profile. The biggest reason that people down pay down their loan quicker is because they can’t. It would be great to use all the residual cash flow you have on the property to cram down the principal. This isn’t possible if you need it to pay down other debts. This is especially important in the world of real estate. You can have a large portfolio, but if it is being eaten up by debt, it doesn’t make a difference. As tempting as it can be to use debt as a short-term fix, you must fight the temptation. If you do use debt, you need to pay it off as quickly as possible.
Owning a property free and clear doesn’t have to be a pipe dream. With just a few extra payments a year this can be your reality much quicker than you think.