The prospect of paying down a mortgage for 30 years can be daunting. Even though interest
rates are low right now, having a mortgage payment is a big commitment. Some people are
happy to go along and pay the minimum every month, but others want to get rid of this debt
as soon as possible so that they can own their homes outright.
If you are one of the second category, and are wondering how to pay it down early, here are
five strategies that can work for you.
1. The Right Mortgage
The most important strategy a homebuyer can follow is to find the right mortgage for their
own unique needs. This is where some homebuyers falter, and end up taking a mortgage to
buy a home that is beyond their capacity. They could end up with a mortgage payment where
they are “living for the house,” or worse, they could wind up in a foreclosure situation where
they lose the home.
When you go to a lender, they will calculate your debt-to-income ratio (the “DTI”). This ratio
will determine how much mortgage you can comfortably manage. They simply determine
your monthly debt versus your income. To be eligible for a home loan, your ratio should be
around a maximum of 45%, as standardized by Federal Housing Administration or FHA. It
means that your monthly debt should not be more than 45% of your monthly income. A
conventional loan might be possible at 49% if your credit is excellent and you have enough
cash for a hefty downpayment.
Now, Life happens, so you need to put a bit of a “cushion” in there. If you run into
unforeseen expenses down the road, you don’t want to be right up against that 45% mark. In
order to pay off a mortgage easily and without any burden, you should look for homes that
will require 35% DTI or even lower. That way you will not only pay your mortgage
installment but also have enough money for other debts and expenses.
2. The Right Down Payment
The second important strategy is regarding is the amount you can pay up front when buying
the home. The bigger the down payment is, the smaller your monthly mortgage payment will
be, and your mortgage terms could be a lot less onerous.
The “standard” down payment amount is 20%, but if you can go higher, it will likely impress
the home’s seller, and will boost your loan application, even if your credit score is not where
you want it to be.
3. The Principal Is The Main Thing
When you take on a mortgage, you will have to pay a certain monthly minimum payment.
Most people only pay that minimum. We don’t usually think in terms of the monthly
mortgage payment being the “minimum,” but if you want to become debt-free sooner, you
can pay a little more than this minimum. That way, the loan’s principal will be paid off early,
and you will then own your home outright.
The reason many people shy away from doing this is because they have bought as much
house as they can possibly afford, or because they don’t want to make the additional
expenditure upfront. In the long run, however, these folks are paying a lot more in interest
over the years. If you can pay your mortgage down in, say, 15 instead of 30 years, you not
only enjoy full ownership of your home earlier, you have the entire monthly mortgage
payment amount back in your pocket that much sooner!
Another strategy some people like to use is to make a mortgage payment every 4 weeks
instead of every month or to make biweekly payments. Mortgage payment amounts each
year going to principle alone.
4. Take Into Consideration Future Maintenance Costs
When setting on a budgeted amount for buying a home, it is easy to forget to take future
expenses into consideration. Not only will you have other monthly expenses such as utilities
and maintenance, you might also have plans to renovate or redecorate.
The rule of thumb is to keep 1% of the home’s value as its maintenance cost for the year. For
instance, for a $250,000 home, that would be $2500. If your projected maintenance cost is
not used up in a particular year, don’t use it for any other use. Keep it aside for big ticket
items like a roof or plumbing repairs that crop up. And they will crop up.
5. Be Ready To Live Frugally
The ideas we’re discussing will depend very much on planning and (importantly) lifestyle.
Buying a home is a big decision and you have to be ready mentally to make changes to your
life to offset the mortgage you are going to pay. Making smaller sacrifices, like maybe
hanging on to that older car for an extra year, or vacationing locally instead of going on a
cruise, will end up being worth it in the long run.
American culture shamelessly promotes instant gratification, so it is easy to rationalize not
spending any extra money to pay down your loan. But think on this: even as little as an extra
$100 payment per month can shave off $26,000 in interest on a $250,000 mortgage over a 30-
year period. If you keep that kind of goal in mind, it will be easier for you to make that little
extra expenditure. Then you can splurge later with all the money you save!