Smart ways to reduce mortgage debt
Getting out of debt

Smart ways to reduce mortgage debt

6 min read November 12, 2023

Introduction

 

 

Smart ways to reduce mortgage debt to buy a home is an exciting milestone, but mortgage debt can feel like a burden. The average mortgage debt for American homeowners is over $225,000. Paying down your mortgage faster can save you thousands in interest and help you build equity and wealth faster. Here are some smart strategies to tackle mortgage debt:

Track your spending and create a budget

The first step is to understand where your money is going each month. Track your spending to identify areas where you may be able to cut back, such as dining out, entertainment, or other discretionary expenses. Once you know your spending habits, create a budget that allocates money towards necessities, debt payments, and savings. Having a budget keeps your finances on track.

Make additional principal payments

Making an extra principal payment each month is one of the best ways to pay off your mortgage faster. Even an extra $100 per month can shave months or years off your loan term. Calculate the impact with an online mortgage calculator. Automate additional principal payments so you don’t forget.

Refinance to a lower interest rate

When interest rates drop, it may be advantageous to refinance your mortgage. This allows you to take advantage of lower rates and potentially lower your monthly payment. Closing costs have to be factored in, so run the numbers to see if it makes sense for your situation. An interest rate drop of at least 0.5-1% may make refinancing worthwhile.

Make biweekly instead of monthly payments

Switching your payments from monthly to biweekly can accelerate your payoff schedule. Making half mortgage payments every two weeks adds up to one extra payment per year. This simple tweak can significantly shorten your loan term over time. You may need to set up automatic biweekly payments through your lender to implement this.

Pay more during the first years

Paying extra during the first 5-7 years of your mortgage has the biggest impact, as more of your payment goes towards interest before you’ve built much equity. For a 30-year loan, paying an extra $200/month during the first 5-7 years can shave a full year off your loan.

Use your annual bonus

If you receive an annual bonus at work, consider using all or part of it to make a lump sum payment on your mortgage principal. While other needs may arise, directing this influx of cash towards your mortgage can cut years of payments. Even a few thousand dollars can have a noticeable impact.

Cash out rewards points

Look for rewards programs and credit card points you can cash in and direct towards extra mortgage payments. Points from credit cards, airline miles, hotel stays and more can often be converted into monetary rewards. While cashing in points, focus on cards and programs with the best redemption values.

Rent out part of your home

Renting out space in your home – like a basement apartment or extra room – provides rental income you can use towards your mortgage principal. Even a few hundred dollars a month can make a difference. Be sure to consult tax and legal experts to ensure you follow regulations for reporting rental income.

Pause retirement account contributions

Temporarily pausing contributions to retirement accounts like 401(k)s and IRAs can free up extra cash to tackle mortgage debt more aggressively. While retirement saving is crucial, mortgage rates are usually higher, so focusing on the mortgage first may make financial sense. Once you hit your mortgage payoff goal, redirect the funds back to retirement contributions.

Also Read:

https://montagnedistribution.com/how-to-prioritize-paying-off-debt/

 

Pick up a side gig

Taking on a side gig like rideshare driving, tutoring, freelance work or paid surveys provides an opportunity to earn extra income that can be applied to mortgage debt. Even a few hundred extra dollars a month from a weekend gig can accelerate your mortgage payoff timeline. The key is to designate this income just for the mortgage.

Cut discretionary expenses

Look for discretionary expenses you can trim in order to dedicate more cash flow to your mortgage payment. Dining out, entertainment, memberships and subscriptions are areas that often have room to cut back. Avoid drastic lifestyle changes and focus on reducing expenses that don’t align with your financial goals or bring you joy.

Consolidate high-interest debt

Using a balance transfer credit card or debt consolidation loan to pay off high-interest credit card balances can give you more room in your budget to make extra mortgage payments each month. This allows you to reduce or eliminate those hefty interest rates so more can be allocated to the mortgage.

Tap into home equity

If you’ve built up substantial equity in your home, consider a cash-out refinance to tap into your equity and pay down your mortgage balance. A cash-out refinance replaces your existing mortgage with a new, larger loan and provides you with the difference in cash. This can give you tens of thousands of dollars or more to apply directly to your principal balance.

Get assistance from your family

If family members are able to help out financially, consider asking them to gift you lump sum payments to help reduce your mortgage debt. Even a few thousand dollars from relatives can put a significant dent in what you owe. Be sure to consult your lender on any tax or documentation requirements.

Method Timeframe Effort Risk
Pay extra each month Long-term Low Low
Refinance mortgage Medium-term Medium Medium
Biweekly payments Long-term Low Low
Pay more early in loan Short-term Medium Low
Use bonuses and windfalls Short-term Low Low
Cash out rewards Short-term Low Low
Rent out home space Long-term High High
Pause retirement savings Short-term Low High
Take on side job Medium-term High Low
Cut expenses Short-term Medium Low
Consolidate debt Short-term High Medium
Cash-out refinance Short-term High High
Family assistance Short-term Low Low

Prioritize what works for your situation

There are many different options for paying down mortgage debt faster depending on your unique financial situation. The strategies that give you the most “bang for your buck” will depend on factors like your income, expenses, lifestyle and risk tolerance. Prioritize the options that align with your near-term and long-term goals.

Conclusion – Smart ways to reduce mortgage debt

The key is staying consistent and dedicated over time. Even small changes can compound and have a noticeable impact on your mortgage payoff. Stay disciplined, focus on incremental progress, and maintaining healthy finances overall. With commitment and a strategic approach, you can become mortgage debt-free faster than you expect.

References

 

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