How to Pay Off Your Mortgage Early
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FacebookShould you payoff your mortgage early? I asked that question a couple of weeks ago, and the majority of respondents said “yes.” With that in mind, I thought I’d put together a list of strategies for doing just that…
Refinance your mortgage to a shorter term
If you refinance your mortgage to a shorter term, say from thirty to fifteen years, you can dramatically reduce the time required to payoff your mortgage. You can see for yourself by playing with a mortgage prepayment calculator. As an added bonus, rates are typically lower on shorter term mortgages.
The downside here is that you will have to pay closing costs, etc. (unless you opt for a “no-cost” refinance). Your mortgage payment will also increase, but what did you expect? You’ll be paying off your mortgage significantly faster, so it only makes sense that you’ll pay more per month.
Biweekly mortgage payment plans
I’ve written about biweekly mortgage payment plans in the past. The trick here is that, by sending in half of your monthly mortgage payment every two weeks, you end up making the equivalent of an extra payment every year.
Don’t believe me? Do the math. Instead of making 12 monthly payments, you’ll make 52/2 = 26 biweekly payments — the equivalent of 13 monthly payments. This will shave years off your mortgage. Moreover, if you’re paid on a biweekly basis, this approach might match your budgeting process better than monthly payments.
The downside to biweekly payment programs is that, while many lenders offer these sorts of programs, most of them charge a fee for the privilege. While it might seem easy to justify such fees based on your long-term savings, there’s a better option…
Overpay a fixed amount every month
When we bought our first house, I started sending in an extra 10% of our total payment as an additional principal payment. Ultimately, this works out to the equivalent of 1.2 extra mortgage payments each year — on par with the biweekly plan, but without the extra fees. Since you’re sending a fixed amount everything month, this is also very easy to automate.
Pay next month’s principal this month
This is an idea that I first read about in “Wealth Without Risk.” It goes like this… When you sit down to make your mortgage payment, send an additional payment equal to next month’s principal.
If you’re not sure what next month’s principal payment will be, just double the amount from this month — that’s close enough. In case you weren’t aware, your mortgage statement should break this down for you, listing the amounts going to principal, interest, and taxes/insurance.
The primary advantage with this approach is that it really puts your mortgage payments into hyperdrive. Over time, the amount you are paying toward principal will increase, meaning that you’ll pay down your mortgage faster and faster as the months go by.
There are two primary disadvantages to this approach. The first is that the amount of your overpayment is variable (increasing each month) such that it can be hard to automate your payments. The second is that it becomes increasingly difficult to keep up with the payments since the overpayment continually accelerates as the interest portion of your payment dwindles.
The haphazard approach
If all else fails, I recommend that you at least take what I’ve termed here the haphazard approach. Whenever you run across a small windfall, simply forward it to your mortgage company as an extra principal payment. Get a check from your reward credit card? Send it in. Get a tax refund? Send it in. Find ten bucks in the gutter? You know the drill… Send it in.
Aside from the fact that this approach doesn’t put any additional strain on your budget, paying down your mortgage with found money can be kind of fun. The downside is that this approach is generally less effective than the alternatives. After all, your additional payments will typically be smaller, and will come at somewhat random intervals.
Closing thoughts
The above list is by no means exhaustive, but it’s a great starting point. If you have any other suggestions, please share them in the comments. If you’d rather invest than prepay your mortgage, that’s fine. In fact, some of the above strategies can be applied to juicing up your investments. For example, make that extra “principal” payment into a brokerage account.
The important thing is to do something.
Published on June 3rd, 2009 - 106 Comments
Filed under: Debt Reduction, House & Home, Mortgages
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About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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106 Responses to “How to Pay Off Your Mortgage Early”
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May 19th, 2010 at 12:42 pm
I personally agree with Lukas. I used the money that I could have used to buy a more expensive house to give a large down payment on my house. I did NOT allow the loan officer (let alone an agent) to tell me how much I could qualify for. I calculated how much I can pay comfortably each month. My mortgage company could care less whether or not I might have an emergency and no money to cover because I am leveraged out making end meets after I mail my mortgage payment. So I am able to double my principal each month and have done so for over a year. I could have bought a house that costs two times what I paid for my house. Thank goodness I did not fall in that trap.
Currently I double my principal and put some leftover in the stock market. Paying down my principal is my highest priority and I use it as means of diversification because I am quite aggressive with my stock market investment approach/system.
June 27th, 2010 at 9:31 pm
lukas (post 100),
i couldn’t agree more with what you said. live like no other, to live like no other. i’m 22 years old, married, first time homebuyer, no kids (dont plan on it anytime soon). we are 100% debt free, with flawless credit. my wife and i gross about $3,700 a month. we have rented for some time and decided now is the time to buy. we found a townhome for $69,900 about 1,000 sq. ft. in southern utah. our plan is to pay $1,700 extra each month. total payment will be about $2,100. with a tight budget and living well below our means, this property will be paid off in 3 years exactly. saving us approx. 65,000 in interest. we plan on living in each property we buy, until 100% motgage free. i think this is an incredible plan and opportunity to be introduced into the world of rental properties.
after we are 100% mortgage free on this townhome, we will purchase a similar type property, around $75,000-$100,000. renting out the first property we will collect roughly $650 a month (based on current rent amount). we will then add this amount to our original $2,100 bringing the total to $2,750 a month to our 2nd property ( of course we will have to budget for the continued cost of hoa’s- $71 a month, and property taxes- about $50 a month). we can pay off this property in 3 years as well. we will continue to do this for the rest of our lives.
from the time we pay off property #1 it will take about 10 years to recover our entire investment from renters. thereby gaining an asset appreciating in value, and providing monthly income for the rest of my life. this same concept applies to each property we buy. incredible.
my strategy blows any kind of stock market return out of the water. averaged out over the 36 months of me making an extra $1,700 a month payment, i will get a 100% “return” on my investment through interest savings. some can argue this is not making money, but i believe that saving money is earning money.
i really like the idea of starting out very small. i feel confident and protected in paying the mortgage. total monthly cost is $100 less than current rental rate. positive cashflow right from the start…amazing. we are on track to close tomorrow 6/28/10 which means we will get the first time homebuyer credit and receive $7,000…. woohooo. what better time than now?
i would like to hear any input on this matter for or against or adding to.
ps. i believe in having an emergency fund
July 8th, 2010 at 8:18 pm
I read this article today and wow I am doing it right. My monthly payments on my home is $1441. I pay each month $1600 instead and have been for over three years. Now the mortgage company really hates me they send me emails telling me I do not have to make the extra payments well—— yes I do it is good for me. HA mortgage company take that.
August 10th, 2010 at 2:55 pm
This sounds great. However, we are in our late 50’s and plan to sell our house within a year. Would it still be worth us paying the principal as suggested or investing that money in hopes of increasing our retirement savings?
Thank you. We’re not sure which way would be best for us.
August 10th, 2010 at 3:14 pm
Georgia, I would save for retirement, especially if you are in your 50’s AND the money you are talking about can be tax sheltered in a retirement account. The extra money paid to the mortgage in your case won’t save you much in interest if you are selling within one year, and there is no guarantee that you sell your house for what you are asking for it. Of course, most investments are not guaranteed either, but the long term possibility to do better with them will probably be more rewarding than any interest saved.
But if you are not maxing out your tax sheltered retirement options, you lose the opportunity to do so with each passing year. Then decide if you want to pay more on your next mortgage when/if you get one. Just something to consider.
August 10th, 2010 at 3:15 pm
If it were me (and without knowing any more details), I probably wouldn’t prepay if I was planning on selling within a year.