Paying off a mortgage in 10 years sounds crazy, right? Maybe not.
A home is likely the most expensive asset you will ever finance and can take decades to pay back, costing tens of thousands of dollars ? or more ? in additional interest. Not only does paying your mortgage off early save money, but there are psychological benefits, as well. You can rest easy knowing your house is completely paid off and you are living debt free.
Paying off your mortgage might sound impossible, especially if the value of your home is still recovering from the housing crisis, but it?s actually easier than you might think. Here are some ways you can start chipping away at your mortgage to reduce your repayment time.
Rent out space in your home
Thanks to the new ?sharing economy,? it?s easier than ever to make money off the unused space in your home. You can rent rooms or your entire house to students or vacationers through sites like Airbnb.com, or opt for long-term tenants while you live somewhere less expensive. There are also services like Store At My House, through which you can rent out your storage space or parking spots.
Sharing your space with strangers might sound uncomfortable, but you?ll never know until you try it. Plus, hosting students and Airbnb guests is a relatively short-term commitment. You don?t have to keep doing it if you decide it?s not worth the savings.
Accelerate your mortgage payments
According to Dave Ramsey, an American financial author, if you make one extra mortgage payment each quarter you?ll save $65,000 in interest and pay off your loan 11 years earlier than planned, given a 30-year mortgage at 4.00 percent.
To make the process as painless as possible, simply divide your mortgage payment by 12 and add that amount to each monthly payment. Make sure the payment is applied to the principal balance and that your lender doesn?t charge any prepayment penalties.
Make bi-weekly payments
The bi-weekly payments system is meant to cut short your loan?s amortization schedule. Instead of making 12 payments a year, you make one payment every two weeks, which adds up to 13 payments a year. With each 13th payment, the principal balance of the loan gets reduced, which shortens the payoff period.
Some banks can set up this payoff plan for you, but you should probably do it on your own. That way you won?t be locked into a bi-weekly payment contract with the bank if you change your mind.
Refinance your loan
Refinancing your mortgage loan can help you in a few different ways: You can shorten the loan and brave through higher payments until it?s paid off, you can lower the payment and pay the difference toward the principal, or you can get a lower interest rate. These refinancing options could shave years off your mortgage and save you thousands in interest, as refinancing gives you the opportunity to draft up a brand new loan.
If you don?t have much (or any) equity in your home, you might qualify for the Home Affordable Refinance Program. This program is specifically for homeowners who are underwater, or near underwater, on their homes. There?s more good news: the HARP deadline was just extended to Dec. 31, 2015.
Implement the Australian Method
The Los Angeles Times has called this system ?mortgage payoff on steroids.? The Australian Method is an accelerated mortgage payoff plan that uses a line of credit to pay down the loan. It takes a lot of discipline and special computer software. This is how it works: The home equity line of credit gives you the cash to make large periodic payments against your principal balance. When you deposit your paychecks into the line of credit, the software system alerts you when your account has evened out again for you to make another large payment.
The Australian Method has its drawbacks, however; it only works if you always have excess income each month after covering your basics and you also must repay your line of credit each month without fail. It?s also risky because you are using all your extra cash to pay down the line of credit, instead of putting it into savings. If you have an emergency, you might have to pull from the equity line, which could really make a mess of things.
5 OTHER PAYOFF TIPS
If paying off your mortgage in 10 years just isn?t going to work for you, there are still other ways to reduce the payoff time.
?Set a payoff date
Use an online mortgage calculator to set a payoff goal that is challenging but attainable.
?Increase your earnings
Take extra shifts at work, wait tables on the weekends, pick up holiday or seasonal work, freelance, pet sit, dog walk or do odd jobs to bring in extra income.
?Get super frugal
Start eliminating all unnecessary expenses: Cut cable, change your insurance plan to reduce your premium, and stop eating out or buying new clothes. It might sound extreme, but it works.
?Make a lump-sum payment
If you receive an inheritance, tax refund or bonus, apply it to the principal balance of your mortgage loan. The interest savings could be better than any potential investment.
?Round up your payment
Rounding up your mortgage payment, even by just a few dollars, can help you pay off the loan early. Use this round up calculator from HSH.com to find out just how much you can save.