Across the country, millions of Americans own their homes outright. In other words, they no longer pay mortgage payments or owe a single penny to the bank – it’s 100 percent theirs. For many people, this is the chief goal for financial freedom.
But what about real estate investors? As a landlord, how much bigger would your monthly cash flow be if you paid off your rental property’s mortgage earlier than scheduled? It would essentially count as another paycheck each month. And while you may not be able to pay off your mortgage in two or three years, you may not have to wait 15, 20, or 25 more years to get even with the bank.
Let’s briefly analyze some tips and strategies that homeowners and landlords frequently use to pay off their mortgages quicker:
This first piece of advice is really a tip to consider before buying the property, but we’ll go ahead and discuss it for future reference. While a lender may approve you for a certain dollar amount, you have to understand that they’re only estimating your financial situation. They’re looking at the numbers you’ve provided them and are guessing that you can afford to make a particular payment each month. But just because they say you can afford something, doesn’t mean you should buy it.
You may qualify for a $250,000 loan, but it may make more sense to buy a home for $200,000. This lower price tag allows you to put more equity into the home and reduce the monthly mortgage payment in the long run. Buy a home you can actually afford and you’ll position yourself for a quicker payoff.
The quickest way to pay off your loan is to make biweekly mortgage payments. Check with your lender to see if this is an option or if they charge a fee for this service. In many cases, biweekly payments can be set up at no additional cost.
As the name suggests, biweekly payments mean you make a mortgage payment every two weeks. If your typical monthly mortgage is $1500 due on the first of the month, your biweekly mortgage structure would require you to pay $750 on the first and fifteenth of the month. The benefit is that you end up paying 13 payments each year, which accelerates the process and saves a significant amount in interest.
Over the course of many years, this biweekly structure may enable you to pay off your mortgage five to eight years quicker with a savings of 23-30 percent of total interest costs.
You don’t have to make two payments per month to speed up the process. Simply paying a few dollars more each month can help. Use one of Bankrate’s mortgage calculators to see how much you can save by adding a little bit to your principal.
One of the least intrusive things you can do is round up your monthly payment. If you typically pay $764 per month, round it up to $800. The additional $36 per month could save you a handful of payments on the backend. If you do decide to add money to your payments, read your contract first. You need to make sure there aren’t any prepayment penalties.
One simple solution to paying off your mortgage faster is to refinance with a shorter-term deal. If you have a typical 30-year mortgage, switching to a 10, 15, or even 20-year mortgage can be beneficial. While the amount you pay each month will be higher, it’s usually not enough to make or break you. This is especially true if your renter is already covering the mortgage.
You don’t have to refinance to get the full effect of refinancing, though. Simply treating your 30-year mortgage like a 15-year mortgage – making increased payments – is a low-risk way to pay it off faster.
Take an honest look at your current budget as a landlord and find ways to eliminate unnecessary expenses. Whether it’s superfluous landscaping, outrageous home warranty premiums, or low rent rates, saving a few dollars and applying it to the mortgage each month can significantly reduce your long-term payment obligations.
It’s important to note that paying off your mortgage in advance doesn’t always benefit homeowners and investors. While it may seem contrary to everything you’ve been taught over the years, having a mortgage is often financially beneficial.
“The intuitive response is to get out of debt. We all want the security of owning our castle free and clear with one less expense to deal with,” says Todd Tresidder, a financial coach and author.“The prospect of making monthly payments for the next 30 years is antithetical to freedom. However, there are times when intuition and finance disagree.”
Tresidder mentions a number of situations in which it makes more sense to keep your mortgage and attend to other financial needs. For example, it’s much better to pay off student loan debts or save for a child’s college education than it is to spend a few thousand dollars more on your mortgage payments each year.
It essentially comes down to your financial situation, though. By studying your situation and speaking with a financial advisor, you can determine whether or not it makes sense to go ahead and pay off your rental property’s mortgage or ride it out for the life of the loan.
At Green Residential, we’re proud to offer professional property management services in the Houston area. Whether you own a single investment property or have the weighty responsibility of managing multiple rentals, we can help you maximize your monthly income and eliminate wasted time.
Through careful tenant screening and meticulous attention to detail, we’re able to help our clients consistently maintain low turnover and high occupancy rates. For additional information on our services, please contact us today!
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