How to Turn Your 30-Year Fixed-Rate Mortgage Into a 15-Year
Written by Jason Nelson on March 2, 2015
By: Sky Slicer
A lower interest rate, the desire to consolidate debt, the chance to tap a home’s equity to make a large purchase, and the opportunity to switch from a fixed- to an adjustable-rate mortgage are just a few reasons why a homeowner would want to pay off a 30 year fixed rate mortgage in 15 years. How can a borrower turn a long-term mortgage into a short-term one?
Some experts say that the only way to do this is to refinance. Many home buyers are using numerous programs, such as the RFA Streamline Refinancing, VA Streamline Refinance, and HARP, to refinance their long-term mortgages. However, a borrower can pay more each month and get the same result without “resetting” the loan. Additionally, a 30 year mortgage gives more flexibility, a homeowner being able to cover his monthly payment even in months when he needs extra cash for other things.
Since the goal of any borrower is to get rid of debt as soon as possible, below are three ways to pay off a 30 year fixed rate mortgage twice as fast:
- “Prepay” – Switching from a 30 year mortgage to a 15 year mortgage involves compressing the loan repayment to a shorter period. According to experts, this will increase the loan payment by about 45 percent. As many homeowners do not want to commit to paying a higher amount every month, they skip the refinance programs and choose to “prepay” their mortgages instead. If the mortgage payment is $1,600 per month, for example, but the borrower sends $2,300, he will be able to pay off his mortgage in 15 years, while saving more than $100,000 in interest. Our example assumes a $250,000 mortgage and a 4.5 percent interest rate.
- Bi-Weekly Payments – Opting for bi-weekly payments is a great idea to reduce the term of a mortgage even more. Based on the aforementioned example, if a homeowner chooses to pay $1,150 every two weeks, he will reduce the payoff timeline by about 1.5 years. Besides paying the mortgage faster, the borrower will save more than $10,000 in interest. Some banks offer bi-weekly payment plans for free, while others charge a fee.
- Extra mortgage payment – Making an extra mortgage payment every year can help a homeowner shorten the term of his mortgage as effectively as a bi-weekly payment plan. For instance, a borrower could use his year-end bonus to make a 13th mortgage payment.
Therefore, if a homeowner can afford to pay around $700 a month – it could be more or less, depending on the total mortgage amount and interest rate – he can cut many years off his mortgage. To find out exactly how much he needs to pay each month to turn a 30 year fixed rate mortgage into a 15 year mortgage, he can always use a loan calculator.
But what if a borrower cannot afford to add a few hundreds of dollars to his mortgage payment every month? In this case, he can round up his payments. For instance, an extra $10 a month on a $250,000, 30 year loan can save a home buyer 6 payments at the end of the mortgage.
Another point worth mentioning is that the amount paid extra should be applied to the principal balance, as this will lower the monthly amount that goes toward the interest. Also, it is advisable for the borrower to read the contract to ensure that he will not have to pay prepayment penalties.