Personal Finances

The 7 Best Ways to Manage Finances When Paying a Home Loan

Sep 27, 2018, 3:50 PM | Robin Johnson
Person reviewing personal finances

Whether you already own a home or you're still trying to decide if it's right for you, money management should be one of your top priorities. A mortgage is a big responsibility and can have a huge impact on your personal finances.

To help you improve your personal finance practices, we've compiled the best debt payoff and money management tips to help you manage your mortgage payments.

1. Pay Off Debt

Before you decide to buy a house, it is ideal to have all other debts paid off first. Generally you'll want to pay off your biggest debts with the highest interest first.

Because these payments are higher, once you have them paid off you will have more money to put towards other debts. Basically, you can roll payments from the higher debts into the lower ones, which will allow you to pay off your debt quickly.

If you already have a mortgage, focus on paying down credit cards and other loans. They usually have higher interest rates than a mortgage. Then, once they are paid off, apply what you would have spent on debt payments to your mortgage payment.

2. Make Extra Payments

Extra payments on a mortgage are a bonus because they pay the principal balance of your loan. The faster you pay down the principal, especially in the early years of your mortgage, the more money you will save over the life of your loan. The best way to make extra payments is the quarterly or biweekly payment method.

Quarterly Payment Method

Making an extra payment to your mortgage every quarter (or every three months) can take years off the life of your loan and save you thousands. For example, if you had a 30-year mortgage for $220,000 and a 4% interest rate, using this method you could pay off your mortgage 11 years early, which would save you about $65,000.

Biweekly Payment Method

If quarterly payments sound a bit too intense, the biweekly payment may feel like less of a stretch on your wallet. This method works under the premise that most people get paid on a biweekly basis from their job.

So, each time you get your paycheck, pull out half of your mortgage payment and pay it towards your mortgage. With a biweekly payment schedule, you actually get 26 paychecks a year, not just 24. These two extra paychecks means that, using this method, you'll end up making one full, extra payment towards your mortgage each year. This payment goes right to your principal.

While a biweekly payment doesn't seem to add up to much, the savings are actually quite high. Using the same example from above with a 30-year mortgage of $220,000, biweekly payments would save you $24,000 over the life of your loan.

Some Considerations for Extra Payments

Before you make additional mortgage payments, you'll want to check with your lender and make sure they allow early or additional payments.

Some lenders only allow additional payments during certain times, and they may have prepayment penalties.

Finally, make sure that when you do make an extra payment, your lender knows it should be applied to the principal and not considered an early payment for the next month.

3. Reduce Your Monthly Bills

The more money you save, the more you can put towards paying down your mortgage. And the best way to save is to start budgeting and looking for ways to reduce your expenses.

For example, you might want to consider planting a garden to cut grocery costs, riding your bike to save on gas, or lowering your monthly phone bill. The little things add up!

Another great money saver is planning out your weekly meals and lunches. Purchasing lunch while at work is incredibly expensive in the long run and packing a lunch can save you upwards of $100 per month.

4. Find Extra Income

If you can generate more money coming in, it will be easier to pay off your mortgage faster. Here are some of our favorite ideas to help you find this extra money:

Live on One Income

Though living on just one income is becoming increasingly rare, many families find they can budget so they can live on one income and use the other to pay for the mortgage. Think about how quickly you could pay off your home if you could put your whole paycheck towards your house each month.

Use Your Tax Refund

The average household tax return in 2017 was $2,782. That's not a small amount when you think of it. Instead of going on vacation or buying something fun, chuck your tax return at your mortgage and watch it shrink. This alone will cut 11-12 years off the life of your loan.

Rent Extra Space

Maybe your kids are all moved out, or perhaps you spend a decent time away from home. Either way, you can post your spare space, or even your whole house, on Airbnb to make some extra cash. That money can help pay down your mortgage quicker so you can enjoy your home more.

5. Reduce Your PMI

Another key tip when buying a house is to put down as much as you can for a down payment at the time of purchase. A down payment of 10-20% will reduce or eliminate PMI (private mortgage insurance) payments on the home.

Considering that PMI can be anywhere from .05% and 1% of the total mortgage, it can literally save you thousands of dollars each year. However, it's important to note that PMI payments do not go towards principal on your mortgage and will not pay off your mortgage sooner.

6. Refinance

Home rates are still pretty low right now, so it's a great time to refinance. If you have a higher interest rate, refinancing can end up saving you thousands of dollars in interest.

Refinancing can help you save money in a variety of ways. In addition to lowering your interest rate, you may also be able to reduce your monthly payment, allowing you to pay more towards your principal balance each month. Or, if you have equity in your home it can help you reduce your PMI payments.

You can even refinance a 30-year mortgage into a 15-year one, significantly shortening the total life of your loan.

7. Purchase a More Affordable Home

This seems like it should go without saying, however, many people fall in love with a home and rationalize the large monthly payment required to live there. Just because a bank will approve you for a certain amount does not mean you need to accept all of the funds and get stuck in a house you can't afford.

The best money management tip for affording a home is to work backward. Plan your budget first and determine what you are willing to spend on monthly mortgage payments.

Financial planners, like Dave Ramsey, recommend spending no more than a quarter of your monthly income on housing. This allows you the wiggle room you need to make extra payments and get out of debt sooner.

If you are curious what your current budget will allow, you can use a mortgage calculator to tell you what you should be paying towards your mortgage every month.

Make Purchasing a Home a Reality

More than 26.9 million Americans currently own their own homes outright, and two-thirds of them had to take out a mortgage to get there. These people have certainly proved that it is possible to pay off a mortgage bit by bit.

By following some of these simple money management tips and developing discipline, along with the help of our team at Elevate Mortgage Group, you too can make owning and buying a house a reality.

Robin Johnson