As of 2023, only 40% of homeowners in America actually own their homes outright. This means that most Americans are still struggling to pay off mortgages on time.
Imagine if you knew how to pay off mortgage in 5 years. That would make a big difference. The bank would no longer own your house. You would always enjoy a sense of freedom, knowing that you aren’t obliged to pay money to any financial institution or mortgage company.
It’s not uncommon to find people who spend over 3 decades trying to pay off their mortgage. However, it’s possible to complete the repayment within a much shorter time. This post will examine the best-known strategies that you can use to pay off this debt on time and own your home completely.
Hopefully, if you can execute these strategies accurately, you will learn how to pay off mortgage in 5 years even if you aren’t an experienced realtor.
Can I Pay Off My Mortgage In 5 Years?
Paying off your mortgage in 5 years is feasible. Notwithstanding, the success rate of your repayment is determined by how much you borrowed, as well as your financial capacity. It would be almost impossible to pay off a $250,000 mortgage in 5 years when you barely earn $5000 monthly.
Should You Pay Off Your Mortgage In 5 Years?
Knowing how to pay off mortgage in 5 years has its pros and cons. Depending on your financial situation, you can complete the payment in 5 years. But if you want to maintain an impressive credit score and still achieve other money goals, you might want to extend the duration of your mortgage payment.
How To Pay Off Your Mortgage In 5 Years – 10 Helpful Tips
Playing off your mortgage early would help you save money on interest and prevent possible financial stress in the future. Here are 10 practical strategies to help you achieve this:
1. Make Extra Payments
One of the most common tactics that makes it possible to pay off your mortgage in 5 years is making extra payments to the loan. Making extra contributions to the mortgage repayment reduces the number of years you were meant to spend clearing up the debt.
For example, let’s assume you have a $220,000 mortgage with 30 years to complete the payment. Making an extra house payment of $1,050 every quarter will enable you to pay off the debt 11 years early. Besides, you will save tens of thousands of dollars in interest.
However, there are some ground rules you must be fully aware of before you try to make extra house payments. Firstly, check with your mortgage company. Some lenders do not allow extra payments; if you refuse to follow this rule, you will be charged prepayment penalties.
Also, you must inform your mortgage company that you want your extra payments to be applied to the principal balance instead of the following month’s payment.
2. Refinance
Sometimes, the best way to pay off mortgage in 5 years is to consider refinancing. This means you will trade the mortgage in for a better loan, which usually comes with a lower interest rate and a shorter time to complete your repayment – perhaps a 15-year fixed-rate mortgage.
Of course, a 15-year mortgage will attract a bigger monthly payment. However, if it’s within your budget, it’s a good deal. Instead of spending 30 years figuring out how to complete your payment, you will achieve that half the time.
If your mortgage company permits it, you can always refinance a longer-term mortgage loan and pay it off as early as possible. But if you already have a low-interest rate, you might not need to refinance anymore. Just increase your extra payments since you will be spending less money on interest.
3. Downsize
This is one effective strategy you should execute when trying to figure out how to pay off mortgage in 5 years. As long as you are willing to crush your mortgage repayment fast, you can sell your larger home and use the profits to purchase a smaller and less expensive house. This means you have literally downsized your home. It’s a good idea, especially if you have a small family.
Moreover, location is another factor you can use to your advantage. A mortgage in New York is undoubtedly much more expensive than you’d get in Ohio, and you can get almost the same house at a lesser price provided you are ready to change your location. Remember, the smaller the principal balance, the easier it is to pay off the loan faster.
4. Buy A House You Can Afford
This is one of the most overlooked tips to pay off mortgage in 5 years. As much as this seems like regular financial advice, it would prevent you from spending 30 years paying back the loan. The fact that you can pay off your mortgage much later doesn’t mean you should be careless with your choice of home. Ensure you purchase a house that you can conveniently afford.
Of course, you might desire a very fancy story building standing in front of the city, but do well to examine your pocket carefully.
More importantly, you must remember that you have other financial commitments. For example, if you are in debt, it’s either you look for a much cheaper home, or you simply forget about the idea of getting your own house.
Also, do you have enough money in your emergency fund in case the unexpected happens? There are many other key factors that should encourage you to apply for a mortgage loan you can afford.
5. Consult A Professional
If you think you don’t need help finding the right mortgage plan that fits your budget, you are making a big mistake. Consulting a seasoned real estate agent when looking for a home will save you from making many bad decisions. It’s much easier to navigate the whole home-buying process when you have someone to hold you by the hand.
Sometimes, a trustworthy real estate agent can help you find a good house before it is announced on the market. This gives you a competitive edge, especially when negotiating an offer. With the right professional support from a buyer’s agent, you can pay off mortgage in 5 years.
6. Maximize Your Downpayment
There’s no denying that the best way to buy a home is by making %100 payment. The house entirely becomes yours. But since you cannot make an outright payment for the home, you should make a reasonable downpayment instead.
Mortgage companies usually allow you to make a 5-10% downpayment, especially if you are a first-time homeowner. However, paying at least 20% makes it possible to pay off the mortgage faster. You will also avoid paying private mortgage insurance (PMI).
But if you can’t pay off 20% of the loan at the initial stage of accepting it, keep in mind that you would have to spend extra money on your monthly payments.
7. Find A Lower Interest Rate
When applying for a mortgage, it’s best to compare different loan offers and their interest rates. This is something you should consider if you must know how to pay off mortgage in 5 years. A lower rate certainly means you would spend less money servicing the loan.
If you find a better interest rate elsewhere, your current lender might be compelled to reduce the interest rate to match the offer other mortgage companies are giving you. As of today, you can even use comparison websites to check out the different interest rates. There are many free websites that are solely developed for this purpose.
8. Consider An Offset Account
Creating an offset account is one of the feasible ways to pay off mortgage in 5 years. An offset account is a savings account directly connected to your mortgage. This account helps you to reduce the amount you owe on your mortgage principal balance. It also lowers your interest, helping you complete your payment faster.
For example, if your offset account (with $20,000) is linked to a $500,000 mortgage, you will only be charged interest on $480,000. But if your offset balance is low, having only $10,000, then you may not need to pay for this feature.
9. Consider Fortnightly Payment
Every mortgage repayment plan would require you to make payments once a month. But since you need to know how to pay off your home loan in 5 years, you should consider switching to fortnightly repayments.
Paying half the monthly amount every two weeks will enable you to make an extra monthly payment every year towards your home loan (this is because each year has 26 fortnights).
However, you can’t rely completely on this method since it’s not very effective. It’s just one of the several mortgage repayment strategies you can combine to speed up the duration of your payment.
10. Avoid Interest-Only Loans
It would be impossible to learn how to pay off your mortgage in 5 years if you allow the loan’s interest rate to eat up your finances. Aside from finding low-interest rates, another way to prevent this is by avoiding interest-only loans.
Here’s the thing: you can only get your mortgage paid off faster when you pay both the principal and the interest. Chances are that your mortgage is a principal and interest loan. This means that you can reduce the principal (borrowed amount) and cover the interest by making steady repayments. However, when it comes to interest-only loans, you can only pay the interest on the borrowed amount.
When You Shouldn’t Pay Your Mortgage Off In 5 Years
As much as knowing how to pay off mortgage in 5 years is good, there are times it might not be the best financial decision to make.
For example, if you want to invest in the stock market, you shouldn’t be in a hurry to pay off your mortgage. Since the average stock market return over 10 years is 9%, you can invest your hard-earned money in this venture rather than paying off your debt 10 years earlier. You would be better off investing that money.
On the other hand, you might want to avoid mortgage prepayment penalties. A mortgage prepayment penalty is a fee issued by the lender if you choose to sell, refinance, or complete your payment within a specific time (usually 3 to 5 years) on your initial mortgage.
Although not all lenders charge this fee, ensure you make inquiries about it before you decide to pay off your mortgage in 5 years.
Another thing you should consider is your credit score. One of the several factors that contribute to your credit score is having a mix of credit types. This means that you should have various credits that you regularly service in order to improve your credit score.
For example, having a credit card, car loan, and mortgage at the same time will improve your credit score, provided you are regularly paying off what you owe.
But the moment you take away your mortgage by paying it off earlier, your credit score will decrease slightly. Although it’s a fair drop, it’s still something you should consider when figuring out how to pay off mortgage in 5 years.
How To Pay Off Your Mortgage In 5 Years: Final Notes
When trying to pay off your home loan faster, there are some lines you should never cross. For example, you should never use your retirement fund to complete the repayment.
The pile of cash sitting in your 401(k) might seem like the easiest way to buy yourself a home with an outright payment. However, doing this would only ruin your financial future. Instead, by using any of the strategies mentioned above, you should know how to pay off mortgage in 5 years without making terrible financial decisions.
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