Financial advisers fall into one of two categories when asked if the mortgage on the primary residence should be paid off early. The first group will state that the most important goal for every household is to become debt-free quickly. The second group believes every situation is unique and some extensive assessment is required to make the decision. Paying off a mortgage early is a large goal for most households. One can get out of their mortgage faster by saving on reoccurring bills, like car insurance and cell phones, and by following these guidelines.
Other Debts First
When other debts are outstanding at higher interest rates, these debts should be paid off prior to applying additional funds to the mortgage loan. A strategy of repaying the debt with the highest interest rate will reduce the debt load more quickly. After the first debt is repaid, the same amount of money should be added to the next debt. As the debts disappear from the monthly budget, the household financial manager must sustain the discipline to use all excess funds for each successive debt. Payments on each debt will be progressively larger since the funds from retired debts are used to repay subsequent obligations that are weighing on the monthly budget.
Every household is wise to have a three to six-month emergency fund prior to beginning an early mortgage repayment project. Repaying the mortgage should be prioritized behind the creation of a fund that would sustain the household through the earliest months following the loss of the primary income. There is also the option of buying mortgage payment insurance, in case something happens. Some people want to use these funds to repay the mortgage, but that is not advisable. The purpose for a cash reserve is to address unexpected situations that require immediate funds without having to use a credit card.
Small Amounts Matter
If the only outstanding debt is the mortgage on the primary residence and the budget is tight, an extra payment of 25 dollars every month will make a difference over time. Every financial institution applies those payments differently. The mortgagee would be wise to ask the bank how the additional payments will be applied to ensure the principal decreases each month. Some banks will wait to apply those extra funds right before the mortgage anniversary date. The result is that interest has been accumulating for eleven months.
When the desire to pay off the mortgage comes with a sense of urgency, some household managers will find other bills that can be eliminated for a time. Cable TV, landline phones and entertainment items can be eliminated without undue strain on the family. All of the funds from these extras can be applied to the mortgage to accelerate the repayment progress. Salary increases provide another avenue for making larger payments to assist with the effort.
Apply Tax Refunds
Federal and state tax refunds cannot always be avoided when the financial situation changes throughout the year. When the refund checks arrive, the funds can be applied to the mortgage to reduce the outstanding principle. Here again, the mortgagee must inquire about the method followed by the bank for the application of this large payment. Reduction of the principle is important for every interest calculation in subsequent months to prevent paying too much interest in each payment.
Adjustments to withholding calculations are an important part of having access to funds throughout the year. If tax withholding amounts decrease, those funds can be applied to the mortgage. Even small amounts of money each month will reduce the amount of interest paid over the long haul. Discipline is required to monitor paycheck stubs for changes that might provide available funds for the repayment project.
Bi-Weekly Payments
Some financial institutions offer the option to make one half of the mortgage payment every two weeks. The result is that 13 full payments are made over the course of a calendar year. When the household budget is tight, this is an excellent method to repay the loan early without extreme strain. Applying half of the payment amount two weeks early every month will decrease the interest on the loan. While one extra payment might not seem like much, this approach can reduce the term of the loan by as much as 10 full years.
Consistency Is Key
The effort to repay a mortgage early is harder than most people realize. Time is required to see the progress on the monthly mortgage statements. Those small amounts will seem miniscule in the early months. After just one year, most people are encouraged by the progress. Whichever method best fits the situation, one method should be followed from one mortgage anniversary to the next. Switching between each of the suggested approaches might be harder to follow and assess the actual impact of each method. Increases in the amount of each extra payment can be made at any point to accelerate the progress.
Final Thoughts
Concerted efforts to repay the mortgage require some planning to fit into the budget and not have unexpected consequences in other areas. Credit card use should be avoided if the entire balance cannot be repaid each month. When financial circumstances change, the mortgage early repayment project may have to be postponed. Close evaluation of the budget and actual household expenditures will provide enough information to make the best decision.
Deferring vacations and large purchases will allow more funds to be used for repaying the mortgage. Car maintenance and preventative health checkups should not be postponed because of the possible risk of costly repairs or illnesses. The difference is obvious in most situations, but the goal to be debt-free can sometimes clouds the decision-making process. Proactive decisions will prevent reactionary situations later.
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