How to Finish Paying Your Mortgage Years Early

Paying off your mortgage early gives you a huge psychological boost because you own your home free and clear as well as saving you thousands of dollars in interest payments. Most people don’t think they have enough extra cash to make larger mortgage payments each month. There are several ways around this, but the most important thing to know is that every little bit helps. Most mortgages allow for repayment of the principal balance early without any penalty fees, but it is always best to check if they have any penalties for paying off a mortgage early.

Pay Towards the Principal

Along with making regular mortgage payments each month, if you add a separate check that is earmarked for paying the principal, you can reduce your overall payments and save thousands of dollars in interest. If you only make one payment a year which is equal to your regular mortgage payments but is towards the principal, you can reduce the loan from 30 years to 25 years. If you can add $100 each month, you will save much more. Be sure to write “Principal Only” on the check.

Paying extra money to your principal also gives the bank a smaller amount on which to charge you interest. The higher the amount of your loan, the higher amount of interest you will pay. Over 30 years, which is the typical time for a home loan, you could pay more than double the original price of your home. Reducing the principal reduces the amount of interest you have to pay. This is how you can save thousands of dollars and repay the loan faster.

Bi-weekly Payments

If you are making monthly mortgage payments, you may consider changing your billing schedule to making two payments per month. There are 52 weeks in a year, so you will make 26 bi-weekly payments which mean 13 months of payments in one 12 month year. There will be one month where you will need to make three payments. This simple method will take years off of the mortgage loan and save you thousands of dollars in interest payments.

Refinance

If interest rates have gone down since you bought your home you could consider refinancing. You will get a lower interest rate and therefore a lower monthly payment. The difference between your previous monthly payment and your new one could be applied to the principal.

Pay in one Lump Sum

If you have a low interest rate, for example under 7 percent, it may not be a good idea to pay off your mortgage early. It would be better to invest the extra money and earn interest and possibly capital gains. At the end of 10 years, you could use the money to make a large payment on your mortgage principal. This also keeps your money fluid in case of an emergency while still giving you the advantage of paying off your mortgage early. This strategy is only effective if you are very sure you can get a good return on an investment, compared to your mortgage. Be sure to think about tax effects as well. You may get deductions for paying mortgage interest and you may also have to pay tax on interest gained on an investment or capital gain.

Get Motivated

When you look at your amortization schedule which is your principal purchase price plus your interest rates, you will see the small amount that is going towards paying down the principal. For example on a loan of $150,000 at 6.87 percent, the payment is $984.90 per month for 30 years. The interest would be $204,554.83 which is more than the original loan. If you pay $100 extra per month to the principal, the loan will be repaid in 23 years not 30. The interest would be $147,998.39. You will have saved $56,556.44. That is $100 per month well spent.

Start Paying Yourself

If you are able to repay your mortgage early, you will have a large increase in your cash flow after it is repaid. The amount you would have continued to pay for your mortgage could be invested instead. If you invested $1,000 per month for the five years you saved on your mortgage, you will have $60,000 plus interest. You can let this remain invested until you retire and have a substantial savings. This can also serve as backup in the case of an emergency where you need cash fast.

If you have a low interest rate on your mortgage, it could pay you more to invest any extra cash you have rather than pay down your mortgage early. If you have an adjustable rate mortgage (ARM), you should frequently recalculate your early payment schedule to know if your interest rate is high or low.

Where to get the Extra Cash

It may take some sacrifices in your lifestyle to pay your mortgage early. Since every little bit helps, your sacrifices need not be drastic. Even $100 per month will help a lot if it is to pay down the principal. The first suggestion is to get a part-time job. This isn’t always feasible, but looking at your monthly expenses and finding ways to save a few dollars each week will quickly add up to $100 a month. Some examples are:

• Eat out less
• Have efficient electricity so your bill is less
• Take public transport whenever possible
• Cut coupons and look for sales

Every family or individual has different habits and practices. What may be easy for one family will be unpleasant for another family. In every lifestyle there is some waste, and small savings make a big difference.

A 30 year mortgage has the advantage of letting the borrower have small monthly payments. It also lets the lender make a lot of money on interest charged for the loan. With the possible exception of a mortgage with a very small interest rate, it is very beneficial for the borrower to pay off the mortgage early. The amount saved in interest will be substantial, and the feeling of owning you own home is great.

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