There are lots of reasons homeowners want to pay off a mortgage early, whether it’s to be debt free or have the security of owning your home by the time you get to retirement. There are many tricks in doing this and as you can imagine some work better and faster than others; some are free, and some are not. Bottom line is to consider what strategy will work best for you and your budget. Remember, small steps made over time will add up and eventually your mortgage will be paid off.
Yes, it’d be nice to win the lottery and pay off your mortgage all at once, but for the large majority of us, it’s not going to happen.
Below are our favorite strategies that are inexpensive, easy ways to quickly pay down your mortgage loan. But first, make sure that you speak to your mortgage advisor to find out the best way to make extra principal payments, so they are applied correctly.
If you operate on a skinny-jean-tight budget, this entry-level strategy may be for you. A measly $50 bucks a month may not sound like much, but over the course of many years, paying down a 30-year mortgage you will make a dent. For example, on a $200,000, 30-year mortgage, you could shave off 2 years and 8 months from your mortgage and save almost $15,000. And chances are, your income will go up as time goes on and you’ll be able to step up to a more aggressive pay down strategy.
By making one extra mortgage payment per year, and making sure it is applied to the principle balance of your loan, you will likely take years off and shave tens of thousands of dollars off of your mortgage loan. There are lots of different ways to make and extra payment. For example, divide your current mortgage loan payment, say $2,400 per month, by 12 and add that amount to your mortgage payment each month. In this case it would be $2,400 + $200. Another painless way to make an extra payment is to pay half of your mortgage payment every two weeks. This way you will make 26 half payments, or 13 full payments per year. By following this plan on our $200,000, 30-year mortgage you will pay off your mortgage 4 years and 1 month early, saving yourself $22,366 in interest.
If you have a long-term mortgage, like a 30-year loan, you can refinance down to a term that will in essence ‘force’ you to pay off your mortgage faster than your original 30 years. Historically rates are relatively low, so if you’ve been in your loan program for a few years, you may be able to refinance down and pay less in interest. And, do not assume if you move from a 30-year loan to a 15-year that your payments will be double. They won’t! You’ll be paying drastically less in interest with a shorter term so your payments may not be as much as you think. For example, our $200,000, 30-year mortgage payment is $955. For the same loan on a 15-year term, the payment is $1,480; however you pay off your mortgage 15 years sooner for only paying 64% more per month.
Finally, if you like plans that are less structured, one easy, yet unpredictable way to pay down your mortgage is to throw any extra money, like bonuses, commissions, tax refunds, and lottery winnings on to the principle balance of your mortgage. Make it your household policy. Even if you prefer a less structured approach like this one, at least keep an accounting of how much you chip away at your mortgage each year. The progress you see will motivate you to keep on chipping away!
If paying off your mortgage early is a goal of yours, we would love to help you get there! As you can see there are lots of ways to do it. You can start small and work your way up as your income grows. Let us help you come up with the plan the best suits you and your situation. Reach out and we would be happy to run your specific numbers with you, so you can see all the possibilities!