Mortgage Talk - How to Shorten a 30 Year Mortgage

As rates rise, many ask how they can pay off their mortgage sooner...

In this rising interest rate environment, many clients are asking how they can pay their mortgage off sooner.

The most common and popular mortgage is the 30-year fixed rate mortgage. This loan program typically has the lowest monthly payment as the loan is spread over the longest period of 30 years.

However, not everyone wants to be in a mortgage for 30 years so what are some strategies to pay off this obligation sooner?

1) Recently many banks and lenders offer what is called a “Choose Your Own Term Mortgage.” This offers you the ability to customize your mortgage term with an odd or even number between 8 and 30 years. For example, if your 42 years old and plan on retiring at age 65 and want your mortgage paid in 23 years, this program allows you to set up a 23 year mortgage to be paid off when you retire.

2) Choose a shorter-term mortgage. In general, shorter term mortgages will usually have interest rates lower than 30-year mortgages. This will save you interest over the life of the loan. There is usually a .125% difference between a 30-year mortgage and a 25-year mortgage. The discount can be .250% between a 20 year and a 30 year. The big discount usually comes if you do a 15-year mortgage. Often times a 15-year mortgage will be .50% lower than a 30. 

To illustrate how this works, a $400,000 30-year mortgage at 4.875% (APR 4.99%) will be $2166.83 per month or $762,059 total. A $400,000 15-year mortgage at 4.375% (APR 4.41%) will be $3034 per month or $546,206 total. That would save you $215,853 in payments!

3) You can shorten the term of your mortgage by paying extra every month. If you divide your monthly principle and interest by 12 months and add that amount to your monthly payment to go towards principle the result is that you will make 13 payments for the year instead of 12. This typically will pay off your 30 year mortgage about four years and three months sooner.

The same can be accomplished if you set up bi-weekly payments with your lender. This is equivalent to making 26 half month payments or 13 full payments for the year. 

Or you could make one extra full payment ever year. This will chop away at the principle ahead of schedule.

These strategies just require self-discipline to make the extra payment every month or at the end of every year. There are even services that will set this up for you for a small service fee. 

Lastly, if for some reason your current rate is higher than market rates you can investigate refinancing your mortgage to a shorter term or lowering your rate. Sometimes you can accomplish both. Even though there are closing costs involved, often times this can save thousands of dollars of interest over the life of the loan. 

Frank Merola

Executive Mortgage Banker

NMLS Mortgage Loan Originator ID: 1020051

William Raveis Mortgage LLC NMLS ID #2630

Cell 508-740-5922

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