How To Pay Off A Mortgage Early
Are you considering a home refinance? For many people with an adjustable rate mortgage, this has been their only recourse to keep their mortgage payment within their reach. Even though an adjustable rate mortgage has caps or limits on how high it can reset, many people never figured on their loan reaching that limit.
Many two income families have also been in the unfortunate situation of one person losing their job or of both needing to take pay cuts. For ones in this situation, a home refinance is done just to save the home and may not involve actually paying down the mortgage and may not be done for savvy financial reasons.
However there are situations when a home refinance can be used to actually pay off a mortgage early. How so? Let’s take a closer look at the entire process to see.
When you go through a home refinance there are fees you pay as a penalty for getting rid of your original mortgage early. These fees are typically a few percentage points of your current loan balance. For the sake of this illustration, let’s pretend these fees total $3,000.
You also have closing costs like you did with the original mortgage. These costs cover an appraisal, an inspection, a title search, broker fees, and so on. Let’s pretend these add up to $1,500, so the total you need to pay up front for your home refinance is $4,500.
With your new interest rate you receive with a home refinance, your monthly payment is going to be lowered; let’s pretend it’s by $250 every month. That means that it will take you 18 months of saving this money to make up for the amount you spent up front. After that time, the $250 you’re saving every month because of your home refinance is like profit from that process.
Of course you can do whatever you want with that money, but to pay down your mortgage early, consider maintaining your original mortgage payment amount. In other words, if you used to pay $1,250 for a mortgage payment and your home refinance brought that payment down to $1,000, think about continuing to pay the original amount of $1,250.
For those first 18 months you’re not really gaining anything because that’s making up for the money you paid for your home refinance, but after that time, the extra $250 you’re paying every month will pay down your principal. The sooner you pay down your principal, the more money you’ll save in interest charges and the sooner you’ll pay off that mortgage entirely.
You can of course spend the money you save with a home refinance any way you want; it’s your money after all. But if you spend it on nonessentials, how is it working for you? Many find it’s better to use that money to pay off other bills, to put it into an interest bearing savings account, or to pay off that mortgage early!
