Money

How to pay off your mortgage 10 years early

HOMEOWNERS can become mortgage-free within a decade by being savvy with their cash.

Savings on bills and budgeting will leave borrowers with extra cash that can be put towards mortgage repayments, leaving them debt-free sooner.

We explain how homeowners can pay off their mortgage early

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We explain how homeowners can pay off their mortgage earlyCredit: Alamy

This would dramatically cut your monthly outgoings, but you’d also save thousands of dollars otherwise spent on interest over the long-term.

Lenders typically let you overpay up to 10% of the outstanding mortgage amount per year, although this could vary so make sure to double-check.

If you overpay more than you’re allowed to and close off the mortgage early, be aware that some will charge a penalty fee.

A low 2% fee on a $150,000 mortgage would still force you to fork out $3,000 so it’s best to stick with in the terms of your agreement.

Cliff Auerswald, president of All Reverse Mortgage, told The Sun: “While it can be tempting to use the funds from your paycheck that don’t go to fixed costs to book a vacation, sometimes the best thing you can do with that extra money is start paying more than your monthly mortgage payment.

“While it might not seem like it will make a huge difference, adding even just an extra 10% to your monthly mortgage payment can help you pay your mortgage off years ahead of when you otherwise would have.”

If you’re keen to pave the way for mortgage freedom, we explain how you to make it happen below.

Switch your mortgage to a cheaper deal

The first step towards mortgage freedom is to switch your home loan to the cheapest one, which works if you’re not already locked into a fixed rate.

In June, rates dropped to their lowest levels in four months with average rates at 2.96%.

This is a further knock down from a year ago, when rates dipped to 3.13% in 2020.

If you’re not already on a good rate, consider locking in before they start to rise.

It could be worth doing as the Federal Reserve recently signalled a hike to interest rates earlier than expected.

Shorten your mortgage term

It’s not just switching to a fixed deal that can help you to cut costs – you can also save cash by cutting the length of your mortgage.

This means your monthly mortgage repayments will rise, but you’d clear the loan quicker.

In other words, there’s less time for interest to build up and the overall cost can be reduced.

For example, taking a $150,000 mortgage with a 2.96% interest rate, you’d pay:

  • 30 year mortgage: $76,541 in interest overall or $629 repayments a month
  • 20 year mortgage: $49,013 in interest overall or $828 repayments a month
  • 15 year mortgage: $35,984 in interest overall or $1,032 repayments a month
  • 10 year mortgage: $23,490 in interest overall or $1,445 repayments a month

In other words, by cutting your mortgage term by 10 years from 30 to 20 years, you’d save $27,528 in interest over the full term.

Meanwhile, your monthly repayments will rise by $199.

Of course, this assumes your interest rate will stay the same throughout the mortgage term.

Just be aware that if you’re midway through your current mortgage deal your provider may have to re-do affordability checks.

You may also be charged a fee to shorten your deal, so you could be better off doing this when your current deal ends.

When you refinance, you’re typically required to pay closing costs that could total up to 1% to 2% of the value of your loan.

Cut bills and set a savings goal

Once you’ve cut your mortgage costs as low as possible, it’s time to go through your other bills and set a savings goal – but make sure you’re realistic.

The US is slowly returning to normal after the coronavirus pandemic, with restaurants, bars and entertainment venues welcoming back customers.

To save cash, can you skip the weekly dinner out or do a movie night at home instead of at the cinema?

Other ways to save cash could be if you’ve received a tax refund, or parents may be able to save the cash given in child tax credit.

If you don’t have any savings, make sure to build up an emergency fund before you splash the cash on anything else.

Overpay on your mortgage

If you’ve managed to cut your spending and save cash, it could be time to overpay on your mortgage principal.

The principal is the amount you borrowed and have to pay back.

Just be aware that while being mortgage-free is a dream for many, you likely won’t get hold of the cash you use to overpay again.

Chad D. Caplinger, strategic financing advisor at Real Estate Bees, told The Sun: “I always suggest going with a 30-year mortgage, take the principal and interest payment, and divide it by 12.

“Take that number and apply that amount extra each month and request it be applied to the principal.”

It’s important to tell your bank that it should go towards the principal, or it may use it for early interest payments instead.

While Tabitha Mazzara of mortgage lender MBanc, added to The Sun: “Although it might feel good to know you fully own your home, there might be more financially savvy places to put your money.

“If you put all of your spare cash into mortgage payments, it’s money you don’t have for things like investments or unexpected bills.”

Consider switching to an all-in-one mortgage

If you don’t want to lose the overpayment cash for good, you may want to consider switching to an offset mortgage.

The loan keeps your mortgage debt and savings in separate accounts with the same bank.

The cash savings are then used to reduce – or offset – the amount of mortgage interest you’re charged.

In an offset mortgage, the savings remain yours and can be withdrawn whenever you want to.

But if you do, they will no longer offset your mortgage debt.

You should also keep in mind that you won’t earn any interest on your savings.

A married couple say they’re on track to retire at at the age 50 by living off half their salaries during a “no-spend year.

Meanwhile, a dad broke down in tears after finding out that his 24-year-old son had paid off his entire mortgage so he can retire early.

Plus, a mum-of-two has revealed how she paid off $266,000 in debt in three years.

Super scrimper Gemma Bird reveals how she paid off her mortgage and gives advice for first-time buyers




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