How to Pay a 30 Year Mortgage in 10 Years
Many people prefer to pay their mortgage early because they will not only have complete ownership of the house sooner, but they will save thousands of dollars in interest payments. However, lack of financial planning can make mortgage payments a huge burden.
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Instructions
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Determine your debt-to-income ratio. The first part of faster repayment is financial planning. Debt-to-income ratio is the amount of debt that you owe as a percentage of your income. Most experts agree that debt must not constitute more than 28% of your income. Debt includes mortgage payments, car loan payments, credit card bills, student loans and other personal loans. If the ratio is less than 28%, then you can go ahead and increase your payments to pay-off the mortgage faster. Otherwise, you may want to focus on paying down your debts so that you have more money available to pay down your 30 year mortgage.
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Review your amortization table. Contact your lender and ask them for a copy of your amortization table. This document will clearly identify how much principal and interest payments you are making and what is the best way to handle them. For instance, let's say you're paying January's mortgage payment and you realize that $52 of that payment is actually going toward February's mortgage payment. So, by knowing this information, you can plan a "mortgage attack" on future payments.
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Use a mortgage calculator to make your calculations. To determine the exact amount that you should pay, you should visit a site like Mortgage-Calculator that features an interactive mortgage calculator. See "Resources" for link. With a calculator like this, you'll be able to input the number of years you want to pay off the mortgage, your existing loan balance, your interest rate and the amount that you'll need to pay to completely pay off the balance in 10 years or less. For instance, let's say that your current mortgage is $100,000 and your interest rate is 5.75%. Let's also say that you pay $583.57 per month. You would have to pay an extra $1,096. per month to meet your goal of paying it off in 10 years or less.
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Increase your payments. If you're serious about paying down your mortgage, you must increase your payments immediately. Any extra payments must go towards your principal loan balance and this will significantly lessen the amount of interest you owe and help you pay off your mortgage faster. One way to accomplish this is to make bi-weekly payments instead of monthly payments and in this case, you will make 26 payments in a year instead of 12 and this can help you pay down your 30 year mortgage even faster as more of your payment will be applied to the principal. However, you must check with your lender before making your payments bi-weekly because some lenders may charge a fee of $300-$400 if you change your payment schedule. Lastly, you can also make lump-sum payments from time to time and this payment will be made against your capital and not the interest.
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Refinance your balance. Another option that you can consider is refinancing. This is the process by which you can pay the current loan with a new loan. In other words, the existing terms of repayment are altered to make provisions for a better payment schedule that is best suited to your needs. You can refinance if your 30 year mortgage is a fixed-rate mortgage and if your existing interest rates are higher than current rates. To determine current interest rates, visit Bank Rate. See "Resources" for link.
This will help you to save up to 25% or more on the interest alone and shed 5-10 years off your loan. You can also refinance if your lender is going to charge a penalty for early repayment of the loan. By refinancing, you can avoid penalties and choose a schedule that will help you to pay off your loan faster.
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Monitor your account with your lender. Finally, you must monitor your payments and balance and must ensure that the payments you make are applied correctly to your account. It is also a good idea to stay informed of the market conditions. This can help you to make better decisions regarding your mortgage payments.
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