What's the Best Way to Reduce Mortgage Term?

If you’re like most homeowners, your mortgage payment takes a large part of your budget. If you’d rather not have a home loan for 30 years, here are some ways of reducing the term. There are many advantages of having a shorter-term mortgage. You’ll pay less interest and add more wiggle-room to your budget. Read on for tips on how you can become mortgage-free faster.

How to Reduce Mortgage Principal

Whether you’re talking about a 30-year home loan or a home equity line of credit (HELOC), you’ll pay less interest when you reduce the principal. That’s because the interest is based on the principal. Here are some ways you can reduce how much you owe on your mortgage.

Pay Extra Each Month on Your Principal

The best way to do this is to include the additional funds in your autopay. Just make sure the extra portion is directed towards the principal. For example, if your mortgage payment is $1350, pay $1400. It doesn’t have to be that much. Every little bit helps. And when you build it into your regular payment, you’ll see progress every year.

Make Bi-weekly Payments Instead of Monthly

This strategy could be perfect for those who get paid bi-weekly. At the end of the year, you would have paid 13 payments instead of 12. And when the payment is consistent and worked into your budget – you won’t even miss the extra money. Plus, it could make budgeting easier since it’s breaking the payment in half.

Make One Extra Mortgage Payment Each Year

Pay down your mortgage by putting extra money down on the principal. For those getting a tax refund, instead of buying the latest tech gadget that will be outdated in two months, put the refund towards your mortgage balance. The same is true if you get a bonus from work, pay down your mortgage. If you’re focused on paying down your mortgage, you’ll be surprised at how much difference these extra payments can make.

Pay an Extra Lump Sum

If you receive a large lump sum, that’s the best time to pay down your home. The funds could be coming from the sale of another property,  an inheritance, stock sale, or somewhere else. When you have a large amount of money you’d like to use to pay down your mortgage, contact your lender to see about a mortgage recast.

How Much Will a Lump Sum Reduce My Mortgage?

If you’re wondering how much your payment will go down, the easiest way to find out is to contact your lender and ask them. That way, you can decide if it’s the right thing to do.

Also, inquire about a mortgage recast. Here’s how it works:

• You put a large payment towards your mortgage.
• Your lender then recalculates your payment based on the new balance.
• Keep in mind that the interest and term will remain the same.
• After the lump sum is applied, you enjoy a lower monthly mortgage payment.

Many borrowers haven’t heard of a mortgage recast. But, it is a great way to reduce your mortgage term and pay less interest over the life of the loan without refinancing.

A recast is also an excellent option if you’re selling your home and buying simultaneously. This can be a huge stress reducer in a hot real estate market. Instead of selling your home and then buying, buy your new home, carry two mortgages for a few months, sell your first home, pay down your new mortgage with the sale proceeds, get a recast, and have a lower payment.

How to Reduce Years on Mortgage

Consider paying extra in the mortgage recast scenario above. Keep in mind — a recast doesn’t change the terms of your loan. The payment is lowered, but the term stays the same. If you were paying, for example, $1,500 a month before the recast and $1,100 after the recast — if you continue to pay $1,500, you’ll pay the loan off sooner.

When you have a budget and know how much mortgage payment you can afford, use discipline to pay as much as possible.

Reducing Mortgage Debt

Another way to reduce mortgage debt faster is by refinancing to a shorter term. For example, if you have a 30-year mortgage, you could refinance to a 15-year. When interest rates are low, shorter terms like 15, 20, and 25-years have much more affordable payments.

Whether you want to retire without a mortgage or just add room to your budget, follow the above tips, and you’ll make significant progress.

To learn more about PenFed loans or what loan is right for you:

• Call 866-386-7254
• Visit Get my Rate
• Visit the Mortgage Center