One of the largest expenses anyone can have is paying for a living space. Whether it’s rent or mortgage, think of all the money you could have saved up to invest or pay for those $10 lattes at Starbucks. If you’re a first time homeowner or you’re about to become one, understanding how your mortgage works can be really intimidating. Hey, my name’s Steve, and I want to talk about 3 ways on how you can pay off your 30 year fixed mortgage quickly.
Let’s be real, being under the pressure of making regular mortgage payments can sometimes suck the life out of you, and your wallet 😭. I remember when I made my first mortgage payment; I never felt so poor after making my payment. I thought, jeez, there’s gotta be a way to pay this off quicker because I don’t want to be doing this for 30 years straight!
One of the most common ways to pay off your mortgage faster is to refinance. You refinance when interest rates are lower in order to lower monthly payments across the board since you change your interest rate. However, keep in mind that when you refinance, you’ll have to pay lender fees and closing costs so make sure that in the big picture, you are actually paying a lot less than you would have paid for the refinance. If for example, I have a loan of $350k and I refinance because interest rates are half a percent lower but lender fees are around $3k…it may not necessarily be worth it since you’re not saving that much more in interest by the time you pay off the loan. You’re better off taking that money and making it grow in the stock market or something. If you’ve recently refinanced, tell us how much you ended up saving in the comments below.
2. Principle Payments
The second way to pay off your mortgage faster is to make additional principal payments to your loan, duh. But let’s look at the math behind it: if you have a fixed-rate mortgage, you’ll have interest which is front-loaded. This means that your monthly payments will be mostly interest at the beginning of the loan [animation-5] and then over time, there’s a gradual transition in the RATIO of interest to principal until it’s mostly principal towards the end. When you put additional principle earlier, what this does is it shifts the RATIO quicker towards principle since there’s less principle remaining. It’s a mini-snowball/compounding effect which ripples throughout the entire life of the loan, accelerates your loan payoff and shaves off the remaining NUMBER OF PAYMENTS left in the loan, which also has an interest-reducing effect. It cuts your interest down across each payment.
The third and final way is to re-amortize or recast your loan. What this means is your lender will recalculate your loan based on the REMAINING principle in the balance of the loan. So if you start out borrowing $500k and after 5 years, you have $400k left, when you re-amortize, it’s like asking your bank to recalculate your loan based on $400k. The number of payments remaining do not change so if you have 200 payments left for example, you’ll still have 200 payments left after you re-amortize. Although your interest rate stays the same, the amount of interest you’ll pay for the remaining 200 payments is actually less since it’s based on the new remaining principle. [animation-8] It shaves off the total PAYMENT DUE each period. Think of it like it’s squishing the amount you pay downward; if your original payments were $3000 per month with a ratio of 2000 in interest, and 1000 in principle, and recasting SQUISHES your payments down to $2100 per month, then you’ll have a $1400 in interest and $700 in principle. Yes, you pay less principle, but hey, you’re saving $600 in interest. One strategy is because you’ve “loosened the belt” by reducing your monthly payments, the amount it’s reduced by can circulate back into your principal as additional payments, accelerating the RATIO as we’ve just covered in the second point.
If you choose not to do this, it’s still cool because your minimum REQUIRED payments are much lower, reducing the mental stress you may have in having to meet the minimum. And relieving some of the burden of having to pay a higher cost each month. Keep in mind, when you recast, you MAY have to pay a recast fee of a couple hundred dollars and typically need to put down some lump sum of principle along with it. However, you do NOT go through the same rigorous process of applying for a refinance. It’s typically much faster. You ask for a recast and they’ll most likely send you a letter asking you to put in principle and then you sign some papers and voila! Monthly payments reduced! You may have to ask your lender whether or not re-amortization (or recasting) is available for your loan since it’s different for many lenders. Also, if you’re considering recasting, make sure you ASK for a payment schedule upon recasting so you would know how your payment plan looks like moving forward. Some lenders typically allow recasting only for jumbo loans.
Some people may mix and match some of these depending on their situation. Make sure you look at your financial situation and see what makes sense for you both financially and mentally. Consult your trusted loan officer on what options are available to you in terms of payment plans. You don’t always want to pick the most aggressive payment path because you might want to save up more for an emergency. You also want to also be happy and not feel like you’re under pressure to pay your whole loan off without stopping to smell the roses every now and then. Depending on how you approach recasting, in some cases recasting may make you pay a little bit more interest over time vs just paying principal payments outright, but the tradeoff is you get lower required monthly payments. You may find that valuable in case of a layoff in your household where a major source of income is reduced and you need to be able to meet the minimum monthly payments. It may also reduce mental stress because now you’re not obligated to pay as much as you did every month.
Once you’ve paid off your mortgage and you’re mortgage free, you’ll be left with just property taxes, homeowners insurance, and maybe HOA or additional assessments depending on where you live. With the amount of cash you have coming in through your income streams, think of all of the things you can do without the burden of mortgage; you can finally make guac at Chipotle as a regular occurrence, help your loved ones financially, and/or invest in the stock market and sell covered calls.
You can opt to balance your payoff by putting a little bit in your mortgage, and little bit in your stock portfolio, so you can further diversify how your money gets used. What are covered calls you ask? My team and I have a course where we teach people strategies on trading in the stock market to get to financial independence much quicker. We basically use the money we save from lowering our mortgage and sell covered calls to make an easy $800-$8000 per month just by spending 5 minutes on our phone’s brokerage app.
So that takes care of 3 ways you can pay your 30 year fixed rate mortgage off much quicker.
-Call to Leap Team