Monday, April 6, 2015

The Big Payoff: Paying off your mortgage in less time for less money.

If you account for all the homeowners in the United States, about 20 million of them own their homes free and clear without a mortgage. That leaves about 66 million who are writing checks for mortgage payments every month, looking longingly to the day when they’ll be financially unburdened. Usually, that day comes about 30 years after their first mortgage payment (unless they refinance), as the majority of conventional loans call for 360 payments. And with approximately half of the total tab of your mortgage going to interest (on a 30-year fixed loan at 5.3 percent), paying your home may seem like running a marathon.

But there are ways to get to that finish line much faster, and even significantly reduce the total cost of interest and the loan you pay at the same time. We’ll touch on ten strategies to pay off your home loan faster, but of course consult a mortgage professional or financial planner to make sure it’s right for you.

But before you start paying your mortgage down faster, it’s important to weigh these three important considerations:

Your payoff of principal and interest follows a set schedule, called amortization. However, in the first years of any loan, you’re paying off almost all interest and very little principal. So the sooner you contribute extra money toward your mortgage, the more benefit you’ll receive. Conversely, starting to add extra payments after fifteen or twenty years of payments won’t have nearly the same effect.

Therefore, the BEST thing any homeowner can do is to start paying extra from the very beginning.

How long you stay:
If you plan on staying in the home (and the loan) for a long time, then paying extra is a great tactic. However, if you plan on selling or refinancing in a few years, it may not be prudent to try and pay it off.

What you earn on that money:
If you have other investments that are yielding a great rate of return, or other debt like credit card balances at a high interest rate, your money might be better served elsewhere for a time.

Here are ten ways to pay off your mortgage faster:
(If you’d like specific numbers, check out’smortgage calculators or talk to a mortgage professional.)

1. Add extra to each mortgage payment:
Every month, you have the option of adding an extra sum to your mortgage payment, which your lender will automatically apply toward principal, paying down your loan more quickly.

2. Double up four times a year:
By essentially making an extra payment every quarter starting when you first get the loan, the interest savings will let you pay off the loan almost twice as fast.

3. Make one extra payment a year:
Instead of making extra payments monthly, some people prefer to write one big check to their lender once a year. How much will it save you?

4. Sign up for bi-weekly payments:
Instead of a monthly payment, most lenders offer you the option to make bi-weekly payments. That may sound like the same thing but remember that there are 52 weeks every year, not 48. The result is that bi-weekly payments will allow must borrowers to pay off their loan about six years earlier.

5. Add your tax refund:
If you get any sort of refund come tax time, or have to contribute less than anticipated for quarterly estimated taxes for your business, it’s a great time to allocate that savings toward paying your home off early.

6. If investment property, add cash flow:
If the mortgage in question is actually on a rental property and you are cash flowing, you may want to add that surplus to the mortgage every month instead of just stockpiling savings.

7. Add “found” money:
A raise at work, a signing bonus, an inheritance, selling a car, a CD maturing, etc. might give you a chunk of cash you can apply to principal, giving yourself an even bigger gift of mortgage savings!

8. Refinance for a better rate and/or a 15-year mortgage:
Recent surveys have found that almost half of U.S. homeowners could benefit and save money from a refinance, so it’s worth consideration. Ideally, you can refinance into a great low fixed rate on a 15-year mortgage, cutting your time to pay it off in half.

9. Round up:
If you’re mortgage payment adds up to $1,821 every month, why not round up and write a check for $1,900, or even $2,000 if you can? You won’t even miss the extra money, and every little bit helps accelerate the payoff.

10. Pay off other debt:
I mentioned it earlier, but you’ll probably want to pay off high-interest revolving debt and installment loans like credit cards, personal loans, car loans, etc. first, and then start allocating that total savings to pay down your mortgage in earnest.

1 comment:

  1. You make a good point to try and pay off your mortgage quickly. It is said that interest is a wonderful servant, but a terrible master. If you can pay of your mortgage faster you won't have to pay as much interest on your home. There is also a great satisfaction that comes from owning your home outright as well.