Routing # 256078446
MORTGAGE KNOWLEDGE CENTER
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MORTGAGE
Best Way to Reduce Mortgage Term
What you'll learn: How to pay down the principal, recast a mortgage, or refinance to a shorter term
EXPECTED READ TIME: 4 minutes
May 19, 2023
You signed on the dotted line for a set mortgage term, but that doesn’t mean your payments are set in stone. Wondering how to pay less interest on your mortgage? There are multiple ways to pay off a mortgage early, saving you money in the process. Explore multiple ways to pay off a mortgage faster with tips to help decide the best option for you.
Pay extra on the principal
Whether you’re talking about a 30-year mortgage or a home equity line of credit (HELOC), you’ll pay less interest when reducing a mortgage principal. That’s because the interest you pay is based on the principal balance. Here are some options to reduce how much you owe on your mortgage:
Pay extra each month
A great way to see progress month after month is to increase your current mortgage payment. Simply include additional funds in your autopay and ensure the extra portion is directed toward the principal. Every little bit helps. Say you have a $550,000 mortgage with a 5% interest rate and monthly payment of $2,952. Using an extra mortgage payment calculator, you can see that adding just $50 extra per month can save you over $20,000 in interest and cut a year off the loan.
Pay an extra lump sum
Have a tax refund coming? Bonus from work? Inheritance? Make a promise to yourself if you receive a lump sum of cash throughout the year, it’ll go straight to the mortgage. This can be a more aggressive way to shorten a mortgage duration, especially when combined with other options.
Recast your mortgage
A mortgage recast, or re-amortization, is a helpful tool offered by some lenders to lower your mortgage payment by paying down the principal. If you have a conventional conforming or jumbo loan, a recast can be a great way to reduce your mortgage term and pay less interest over the life of the loan without refinancing.
Here’s how it works:
- You put a large payment toward your mortgage.
- Your lender then recalculates your payment based on the new balance.
- You enjoy a lower monthly mortgage payment.
An important note: A recast keeps your current interest rate and length of mortgage term. So if you want to pay off your mortgage earlier, consider allocating the same amount as previously. For example: If you were paying $2,150 per month before the recast and are only required to pay $1,950 after, continue paying $2,150 (or more!) to help you pay off the mortgage sooner.
Refinance to a new term
Extra payments on your own can get the job done, but maybe you want more commitment or accountability for paying off a mortgage faster. In that case, refinancing to a shorter term can ensure you keep up with a more aggressive payment schedule and reap interest savings. If you have a 30-year mortgage, you could refinance to a 15-year or even 10-year term.
A mortgage refinance replaces your current mortgage with a new one. With it comes a new interest rate. Shorter term loans typically have lower rates, but that’s in comparison to the current state of rates. Although there are no hard and fast rules, it’s typically recommended to refinance when you can lower your rate by enough to make financial sense.
At the end of the day, any combination of these options can help get you closer to your early mortgage payoff goals. Whether you want to retire without a mortgage or just add room to your budget, choose from the above ideas, and you’ll be sure to make significant progress.
SIMILAR ARTICLES
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Home Buying Steps
Mortgage Products
Disclosures
1Conventional Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
2FHA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
3VA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.125 discount point, which equals 1.125 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $450,000; loan-to-value ratio of 95%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of $995.
4Jumbo Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 0.625 discount point, which equals 0.625 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.
Routing #256078446
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