Home ownership is a dream for many Americans, and taking out a mortgage is the most common way to make that dream a reality. A mortgage is a loan for a home that’s secured by the home purchase, which basically allows you to own a home at the same time you’re paying for it.
Mortgages are typically paid over 15 to 30 years. Should you ever try to pay off your mortgage early? If making payments starts to get harder, you’re not alone. Here’s how to take control.
Here’s what we’re going to cover:
- How mortgages work
- Increase your payments
- Recast your mortgage
- Refinance your home
- Strategies to avoid foreclosure
- Living the dream
Key takeaways
- A home is the largest purchase most people ever make. Because so much money is involved, consider consulting a financial advisor (like one of our friends at UnidosUS) before making any changes to your mortgage.
- Increasing your payments, recasting and refinancing are three ways to pay off your mortgage sooner.
- If you’re experiencing financial hardship, your lender may be willing to modify your mortgage or defer payments to a later date. You will likely still owe the interest while you defer, therefore increasing the total cost if you do this.
How mortgages work
A mortgage lender is typically a bank, credit union, or other company specializing in mortgages. They’ll thoroughly review the buyer’s financial information to ensure the buyers can afford the loan. Lenders often require a home buyer to cover up to 20% of the home price as a downpayment, meaning the buyer must have this money in cash in order to close the deal. The rest is financed with a loan. Depending on the lender or your financial situation, the lender may offer mortgage insurance as an alternative to a higher downpayment.
In an overly simplified way: The lender pays the home seller, and the buyer pays the lender back, over the life of the loan.
Mortgages have either fixed or variable interest rates. With fixed, you pay the same amount each month. With a variable mortgage, your payments may go up or down as the economy changes. In both types, part of your payment goes to the principal of the loan (the original amount you borrow, which will be essentially the price of the home) and part of it to interest and fees (the cost of borrowing money).
A home is the largest purchase most people ever make. Because so much money is involved, it may be wise to consult a financial advisor before making any changes to your mortgage.
Talk with a financial coach for FREE to get personalized advice from our friends at UnidosUS.
Increase your payments
If you have money left at the end of each month, you may want to make larger or more frequent mortgage payments. Tell your lender that you want the additional payments to be applied to the principal, not the interest.
The main drawback to this approach is that some lenders charge a prepayment penalty for ending your mortgage early. Check your contract to see if this applies to your situation, and how much you would be charged for prepayment. You may decide that it’s worth paying the penalty just to get out of debt sooner. Or you may choose to keep the mortgage as it is and invest your extra money where it could earn a better return. A financial advisor can help you calculate what makes the most sense for you.
Recast your mortgage
If you have enough money to make a large lump-sum payment toward your mortgage, you can ask your lender to recast, or recalculate, the agreement. To do this you usually need to make a one-time payment of at least $10,000, depending on your lender’s requirements. Again, you should request that your payment be applied directly to the principal.
You keep the same interest rate and loan term, but each monthly payment will be less. If you already have a low interest rate on your mortgage, recasting could benefit you financially.
Refinance your home
If interest rates have dropped since you took out your mortgage, you may want to look into refinancing. This means taking out a new mortgage in place of your old one. A refinanced mortgage for the same time period, but at a lower interest rate, will cost you less per month. Or you might prefer to keep the amount of your payments the same and get a shorter mortgage term. Remember that you will have to pay closing costs and other fees on the new mortgage.
Strategies to avoid foreclosure
But what if you’re not able to keep up with your mortgage payments? A job loss, the loss of a loved one, or another unexpected hardship can make it harder to stay on track. The good news: there are steps you can take to protect your home and avoid foreclosure.
If you don’t make your mortgage payments, your lender has the legal right to take your home. This repossession is known as foreclosure.
Contact your lender to see what options are available. They may be willing to modify the conditions of your mortgage to make the payments more affordable. You could also ask to temporarily defer payment until a later date. However, either of these methods will increase the total amount you must pay, because you will owe interest over a longer period of time. These are extreme steps to take to avoid losing your home.
The U.S. Department of Housing and Urban Development (HUD) can advise and help people who are threatened with foreclosure. They may have suggestions for negotiating with your lender.
Financial coaches at UnidosUS can also help, and it’s FREE for Oportun’s community (yes that means you! By reading this article, you’re one of us).
Living the dream
A mortgage is a useful tool to bring the dream of home ownership within reach. You may even be able to pay off your mortgage before the due date, and own your home without further loan payments. Just be sure you understand the consequences of any change you want to make to your mortgage agreement.
Oportun: Affordable lending options designed with you in mind
Now that you understand how to pay off a mortgage, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Spoiler: We don’t offer mortgages.
Visit our homepage to learn about:
- Personal loans
- Secured personal loans
- Savings
- And more!
Sources
Bankrate. Prepaying your mortgage: What is it and should I do it?
Consumer Financial Protection Bureau. What is a prepayment penalty?
Experian. What is mortgage recasting?
NerdWallet. Tips to pay off your mortgage faster
Bankrate. Mortgage loan modification: What it is and how to get one
Experian. What is mortgage deferment?
U.S. Department of Housing and Urban Development. Avoiding foreclosure
This article is intended for educational and informative purposes only. It should not be relied upon as personal advice regarding legal or financial matters, and you should consult legal or financial professionals of your choosing. Get FREE financial coaching through our partnership with UnidosUS.
