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It also makes good sense to pay off your house as quickly as possible. And this might be easier than you think. There are at least six ways to do this.
- Add an extra $500 or $600 to all of your payments. Just make sure that all the money is applied to your principal, not your interest or your escrow account. This will definitely free up money sooner than later.
- Make extra payments. If you can make an extra payment several times a year, this might be more difficult than paying a little extra each month but has the same benefits. You can make this less painful by making a payment every two weeks instead of once a month. If you do this, you should be able to knock off at least six years from a 30-year mortgage.
- Pay a lump sum. If you get a money gift, a bonus, an inheritance or a tax refund use the money to make an extra payment on your mortgage. Alternately, you could put the money into a savings account and then arrange to have automatic withdrawals made from it to your mortgage loan. That way you would have the best of both worlds, money in your savings account and money being applied to pay down your mortgage.
- Refinance to speed up the process. If you can refinance your mortgage, you should have a lower monthly payment and could then use the money you've freed up to make extra payments. The biggest issue here is called "declining home values," and your loan-to-value ratio. Plus you'll need to have a good credit score. But if you were able to get a new 15-year mortgage in place of that existing 30-year mortgage, you would definitely be out of debt much quicker.
- Reduce your housing costs. Would downsizing or selling your home and moving to a smaller one make sense? That will depend largely on how old you are and how old are your children. But if it would make sense, you could end up with a more affordable home and a much lower monthly payment.
- Use your retirement savings. The idea of using money from your retirement fund to pay off your house has become increasingly popular recently due to pending legislation in Congress that would waive the early withdrawal penalty if you take money out of a retirement account and use it to pay off a home loan. However, this might not make sense depending on how much you have in your retirement account. And definitely, don't do it if there is a possibility your home could be foreclosed.
What Dave doesn't do
Dave might be very big on the idea of using the snowball strategy to pay off debts but there are other ways to do this that might make sense – depending on your financial situation. As an example of these, you might use the avalanche method where you begin by paying off the debt that has the highest interest rate. Second, you could get a second job and use the money to pay off your debts. Third, you could borrow from your retirement fund and use the money to pay off your debts rather than to pay down your mortgage. And fourth, you might declare bankruptcy, which would discharge all or most of your unsecured debts (like credit card debts) but is basically an option of last resort because of what it would do to your credit for the next 7 to 10 years.