7 Ways to Pay Off Your Mortgage Early
Paying off your mortgage years ahead of schedule may seem impossible, but it’s much easier than you think. Here are seven ways to accelerate your final mortgage payment without breaking a sweat.*
- Add a little more money to every monthly payment. Paying just $50 extra every month can knock about two years and more than $15,000 of interest off your total mortgage loan payback. Adding $100 to your mortgage payment every month lets you pay that mortgage off four years early, and can save you more than $28,000 over the life of your loan.
- Switch to bi-weekly payments. When you use a bi-weekly mortgage payment plan, you make a payment every other week — not twice a month. And since there are 52 weeks in a year, you’d make 26 payments, the equivalent of 13 monthly mortgage payments, every year. Not only would that shave around $35,000 off the total interest over the life of the loan, you’d also pay off a 30-year mortgage in 26 years.
- Make extra payments when you receive bonuses or refunds. Almost any time you make an extra payment on your mortgage, 100 percent of the payment can be applied to your principal balance (as long as you tell the mortgage company that’s where you want the money to go). You can use a tax refund, an annual bonus, even scratch-off winnings to take a bite out of your mortgage. Depending on how much extra you pay, and how often you do it, you could pay off your mortgage years early, and save yourself thousands of dollars in interest over the life of your loan.
- Make 13 mortgage payments a year. Simply making one extra mortgage payment every year could slash around $34,000 in interest off the total, and reduce your loan term by four years. Make sure your mortgage lender knows you want that extra payment applied to your principal balance, and not counted as an early regular monthly payment. You can do that by writing a note on the check, or sticking a post-it on it. If you use online banking, put a note in the payment memo line. On your next mortgage statement, make sure the payment was applied properly. If not, simply call your mortgage company and have them fix it.
- Refinance to a 15-year loan. If your salary has gone up since you took out that 30- year mortgage, consider refinancing to a 15-year loan. Yes, your payment will go up, but your lifetime savings will be astronomical. Consider our scenario: You took out a $300,000, 30-year mortgage at a 4 percent interest rate. After five years, you refinance to a 15-year loan on the remaining principal balance of $271,340 at a 3.2% rate (rates on 15-year loans are typically lower than on 30-year loans). Not only will your mortgage be paid off 10 years early, you’ll also save close to $90,000 in interest.
- Refinance to a lower rate, but keep making the same payments. Your credit rating has a big impact on your mortgage interest rate. Many people see their credit scores improve as they make regular, on-time loan payments — and that can translate into lower interest rates when they refinance. A lower rate on a lower principal balance (because you’ve already paid down at least some principal) brings a lower monthly payment, too. But since you’re already used to making the bigger payment every month, every dime you pay that’s greater than the current payment goes toward paying down extra principal. Depending on the difference in the two payments, you could pay off your mortgage anywhere from two to eight years early, and save thousands of dollars in interest.
- Tap funds (other than your regular paycheck) to make extra payments. Instead of waiting for the occasional windfall (like a bonus or a tax refund), you can actively seek out a steady way to put more money toward your mortgage.
Not sure where to find extra cash? One source could be starting a second job to supplement your regular paycheck, where all the money from your second job goes toward extra mortgage payments. If you’ve got a permanent life insurance policy with a healthy cash value balance, you could tap into that (through sensible withdrawals or policy loans) to quickly minimize your mortgage.** Or, you could finally go through your attic and sell some of those stashed-away goodies on eBay to bring in some extra cash, transforming your collectibles into mortgage principal pay downs.
Remember: Every extra amount you send to your lender reduces your principal balance, which in turn decreases the total interest you pay on the loan. And that helps you pay it off faster than expected.
*Examples are for a $300,000, 30-year mortgage with a 4 percent interest rate
**Withdrawing funds from your permanent life insurance policy will reduce the policy benefit.