Mortgage Strategies

If you have a 30-year mortgage, it may feel as though you'll always be in debt. However, there are effective ways to slash the time it takes to pay off a house. Even better, many of these methods don't require spending a lot of extra money.

Still, paying off a mortgage must be balanced with other financial needs. "I wouldn't want to recommend someone pay off their house and not have an emergency fund," says Dave Totah, a certified financial planner with Exencial Wealth Advisors in Frisco, Texas.

With that in mind, if you already have emergency savings and are putting money aside for retirement, use one of these seven tactics to speed up your mortgage repayment.

"You can get that mortgage paid off pretty quickly if you do that," says Jonathan Scott, professor of finance at Temple University's Fox School of Business. That's because, by the end of the year, you'll have made the equivalent of 13 monthly payments. This strategy can shave four to six years off of a typical 30-year loan. On a 15-year mortgage, biweekly payments may cut one to three years from the repayment time, depending on the loan amount and interest rate.

Some companies have biweekly payment plans that consumers can enroll in for a fee. For instance, AutoPayPlus will manage biweekly payments for an enrollment fee of $399, plus a $2.45 one-time verification fee and a $2.45 convenience fee for biweekly debits. Meanwhile, a few mortgage lenders, such as Wells Fargo, will allow customers to set up biweekly payments for free.

However, you may be able to send in biweekly payments even if you aren't enrolled in a plan. Your mortgage company will likely hold the first payment until the second half arrives. Even for companies like Wells Fargo that offer a plan, this is often the case. Check with your lender to see if and how biweekly payments are accepted and processed.

2. Budget for an extra payment each year. If you don't want to hassle with biweekly payments, you can get similar savings by sending in an extra payment once a year. A tax refund or bonus may provide the cash needed to use this strategy.

Earmark the entire amount toward the loan principal, and you could reduce your repayment term by as much as seven years if you make extra payments annually, says Craig Lombardi, president of the online division for mortgage company Guaranteed Rate.

3. Send extra money for the principal each month. Even if you can't afford to send in one extra payment each year, you could send an additional amount each month. Some people may round up their regular payment to the nearest hundred dollar amount to make record-keeping simple or add $100 to their payment amount. It's a painless way to reduce your mortgage, Totah says.

Contact your lender to confirm how they handle payments that exceed the regular monthly bill. To reduce your mortgage term and interest, that additional amount needs to be applied to the principal. Actual savings will depend on the terms of your loan and how much extra you send in each month.

4. Recast your mortgage. If you get an inheritance or other windfall, consider recasting your mortgage. Some loan servicers offer this option when they receive a lump sum payment toward the principal. Lombardi says that for a fee of about $250, companies will reamortize the loan so that the term stays the same, but the monthly payment is lowered based upon the reduced principal.

"We do that with our clients all the time," says Mat Ishbia, president and CEO of United Wholesale Mortgage. However, every lender will have different requirements regarding how often a loan can be recast and how much must be put down toward the principal. Ishbia says his company requires a minimum $10,000 lump sum payment to recast a loan, but other firms may only require $5,000.

To use this strategy to pay off your home more quickly, continue making your previous payment amount and apply the extra money toward the principal.

5. Refinance your mortgage. You could also apply for a new loan to refinance your mortgage. This can help eliminate debt in several ways.

Refinancing can lower the interest rate and result in significant savings. Homeowners can also refinance for a shorter term to get out of debt more quickly. For instance, rather than refinancing for a 30-year mortgage, the new loan could be for a 15-year term. While monthly payments will be higher with a shorter term, consumers could cut their interest costs in half over the life of the loan.

Scott also notes those with Federal Housing Administration, or FHA, loans may be able to eliminate private mortgage insurance, or PMI, if they refinance to a conventional loan. Insurance on a conventional mortgage can be dropped if a person has at least 20 percent equity in their home. Then, money used for PMI premiums can be diverted to the mortgage principal to speed up the repayment period.

6. Select a flexible term mortgage. If you choose to refinance, consider using a lender who offers flexible term mortgages. These mortgages offer more than the traditional 15- and 30-year options. "Basically, you pick the term of your loan," Ishbia says. Quicken Loans, for instance, offers terms ranging from eight to 30 years.

Shorter terms mean less money paid on interest over time. Ishbia recommends working with an independent mortgage broker who can help determine how short a term you can comfortably repay.

7. Consider using an adjustable-rate mortgage. When the housing market collapsed 10 years ago, adjustable-rate mortgages helped contribute to a wave of foreclosures. The loans started with a low introductory interest rate that adjusted higher after a specified period such as three or five years.

During the recession, homeowners who could initially afford their mortgage payments found they could no longer do so after the interest rates increased. With property values falling, people found they couldn't sell their home for what they owed either.

Given their checkered history, some may be inclined to shy away from adjustable-rate mortgages now. However, they can still be a useful tool for financially stable families. "Most of the time, a client isn't going to be in a home for more than five to seven years," Lombardi says. In that case, an adjustable-rate mortgage can help build equity in a home quickly. The low interest may free up additional money in a household budget to put toward the principal.