We decided immediately upon taking out our mortgage that we would be challenging ourselves to pay off our debt as soon as possible. One of the best ways to get off on the right foot, is to start paying down your mortgage before your first payment. We were able to cut multiple years off our mortgage during the first 5 weeks of our new mortgage, which was a GREAT way to kick this goal off!
Here are a few things we did to cut 3 years off our mortgage in the first 5 weeks:
1. Use Your Escrow Refund. This applies if you are going from one home mortgage to another, all that money that was saved up in escrow from your last mortgage is going to be paid out to you when your house closes. We received over $1,200 from our escrow account on our last mortgage. We took that and immediately paid it towards principal on our current mortgage.
2. Make a Mortgage Payment Even When You Don't Have To. We closed on our new house on Oct 25th, and due to how mortgages work, our first payment was not until December 1st. If you budgeted for your mortgage payment, that means you are skipping a month of paying on a mortgage. Rather than skip the month, make the payment anyway! We paid an extra $1,300 on principal just by making a payment in November as if our mortgage payments began a month early. You could take the month off, but if you already budgeted your paycheck to be making mortgage payments that month, then it shouldn't affect your budget to make a payment anyway!
3. Use Your Insurance Refund. Our escrow account had recently paid our homeowner's insurance, and since we were moving we were refunded the premium from the mortgage company. That was another $900 that we were able to take and make another mortgage payment. Even if you are renting, you should receive a refund on your insurance because you are terminating the policy. If you have a mortgage the monthly payment and closing costs already consider the amount needed to pay for insurance on the new home, so the premium should be returned to you.
4. Don't Spend any Surplus Money on "Stuff." Ideally you budgeted a little high for closing costs and escrow costs in case of an emergency, or you budgeted extra for moving costs. If you have anything left in your budget after all is said and done....now is the time to put it towards your mortgage! We were able to put a few hundred dollars towards our mortgage that we didn't spend elsewhere in moving costs. We could have spent it on any number of home items, but we had earmarked that money for closing and moving, and we decided to go ahead and pay it towards our mortgage.
5. Pay Your Equity Directly Towards Your Mortgage. If this is not your first home, you may have equity in your last home. Depending on whether you sold first and bought second, or vice versa you may be getting a check for the equity in your last home (the price it sold for minus fees and mortgage equals the equity you have in your home). We had about $60,000 of equity in the last home due to paying extra each month. That means, when we sold our home, we received a check for $60,000. Of that, $50,000 had already been paid towards our new home (rather than taking out a larger mortgage) so we received a check for $10,000. Some of that money was already accounted for elsewhere, but the rest we immediately turned around and paid a $3,000 check towards our mortgage! That knocked a number of months off our 30 year mortgage.
6. Use Other Possible Refunds or Extra Cash: There are lots of other little refunds you may be receiving when you move into a home, all of which can be paid (in as small of increments as you'd like) towards your mortgage. Every little bit makes a difference! We received a refund of around $50 for our auto insurance because we were moving into what our auto insurance determined was a less-risky zip code for auto claims. You may also receive money back for utilities deposits if you are switching utility companies. Consider waiting a month to start cable and use that month's cable budget to put towards your mortgage since you will be too busy to watch TV when you're settling down in a new home!
Reminder: One key item whenever you are making "bonus payments" towards your mortgage, is to confirm that the payment is being made entirely to principal. That way, you are tackling the principal of your debt 100%
As small as $50 can make a difference in the long run if you make them periodically. For example, at the start of a new mortgage, the majority of your mortgage payment does NOT go to paying off your loan. Rather it goes to interest and insurance, especially if you are on a 30 year mortgage. We went from a 15 year mortgage to a 30 year mortgage on this new house (that is for another post, but it primarily had to do with my need for security when 1 spouse is staying at home, it was important to keep our mandatory payments more manageable in case of an emergency), so this hit me hard this last time when I looked at our amortization schedule. Let's look at our loan for example:
We pay about $1,300 on mortgage. Of that during our first month of payments $550 went to interest, $500 to insurance and only $250 actually was going to paying off our mortgage! That means for every extra $250 we are paying towards our mortgage right now, its like making an extra mortgage payment.
By doing the above we were able to cut 3 years off our 30 year mortgage! It may not sound like a big deal right now, but what a great start to our journey!
Here are a few things we did to cut 3 years off our mortgage in the first 5 weeks:
1. Use Your Escrow Refund. This applies if you are going from one home mortgage to another, all that money that was saved up in escrow from your last mortgage is going to be paid out to you when your house closes. We received over $1,200 from our escrow account on our last mortgage. We took that and immediately paid it towards principal on our current mortgage.
2. Make a Mortgage Payment Even When You Don't Have To. We closed on our new house on Oct 25th, and due to how mortgages work, our first payment was not until December 1st. If you budgeted for your mortgage payment, that means you are skipping a month of paying on a mortgage. Rather than skip the month, make the payment anyway! We paid an extra $1,300 on principal just by making a payment in November as if our mortgage payments began a month early. You could take the month off, but if you already budgeted your paycheck to be making mortgage payments that month, then it shouldn't affect your budget to make a payment anyway!3. Use Your Insurance Refund. Our escrow account had recently paid our homeowner's insurance, and since we were moving we were refunded the premium from the mortgage company. That was another $900 that we were able to take and make another mortgage payment. Even if you are renting, you should receive a refund on your insurance because you are terminating the policy. If you have a mortgage the monthly payment and closing costs already consider the amount needed to pay for insurance on the new home, so the premium should be returned to you.
4. Don't Spend any Surplus Money on "Stuff." Ideally you budgeted a little high for closing costs and escrow costs in case of an emergency, or you budgeted extra for moving costs. If you have anything left in your budget after all is said and done....now is the time to put it towards your mortgage! We were able to put a few hundred dollars towards our mortgage that we didn't spend elsewhere in moving costs. We could have spent it on any number of home items, but we had earmarked that money for closing and moving, and we decided to go ahead and pay it towards our mortgage.
5. Pay Your Equity Directly Towards Your Mortgage. If this is not your first home, you may have equity in your last home. Depending on whether you sold first and bought second, or vice versa you may be getting a check for the equity in your last home (the price it sold for minus fees and mortgage equals the equity you have in your home). We had about $60,000 of equity in the last home due to paying extra each month. That means, when we sold our home, we received a check for $60,000. Of that, $50,000 had already been paid towards our new home (rather than taking out a larger mortgage) so we received a check for $10,000. Some of that money was already accounted for elsewhere, but the rest we immediately turned around and paid a $3,000 check towards our mortgage! That knocked a number of months off our 30 year mortgage.
6. Use Other Possible Refunds or Extra Cash: There are lots of other little refunds you may be receiving when you move into a home, all of which can be paid (in as small of increments as you'd like) towards your mortgage. Every little bit makes a difference! We received a refund of around $50 for our auto insurance because we were moving into what our auto insurance determined was a less-risky zip code for auto claims. You may also receive money back for utilities deposits if you are switching utility companies. Consider waiting a month to start cable and use that month's cable budget to put towards your mortgage since you will be too busy to watch TV when you're settling down in a new home!
Reminder: One key item whenever you are making "bonus payments" towards your mortgage, is to confirm that the payment is being made entirely to principal. That way, you are tackling the principal of your debt 100%
As small as $50 can make a difference in the long run if you make them periodically. For example, at the start of a new mortgage, the majority of your mortgage payment does NOT go to paying off your loan. Rather it goes to interest and insurance, especially if you are on a 30 year mortgage. We went from a 15 year mortgage to a 30 year mortgage on this new house (that is for another post, but it primarily had to do with my need for security when 1 spouse is staying at home, it was important to keep our mandatory payments more manageable in case of an emergency), so this hit me hard this last time when I looked at our amortization schedule. Let's look at our loan for example:
We pay about $1,300 on mortgage. Of that during our first month of payments $550 went to interest, $500 to insurance and only $250 actually was going to paying off our mortgage! That means for every extra $250 we are paying towards our mortgage right now, its like making an extra mortgage payment.
By doing the above we were able to cut 3 years off our 30 year mortgage! It may not sound like a big deal right now, but what a great start to our journey!
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