Who wouldn’t want to pay off their mortgage faster? The big question is “how do I do it?”
Whether to pay off your mortgage faster, is an important personal financial decision.
But before one can answer “how do I do it,” you must first ask the questions of “can I do it” and “why should I do it.”
The can-I part reveals if one has the financial ability to put more money aside for bigger and quicker payments. The why-should-I part involves whether to use the additional money available, alternatively, for investing or consumption purposes since funds borrowed under mortgage probably have a lower interest rate than say credit card debt.
Paying off a mortgage faster also has tax implications on mortgage interest deduction. If one has the financial means; is willing to forgo any investment opportunity; is prepared to postpone any would-be nice consumption; and has weighed on any tax savings, there are ways that one can consider to pay off a mortgage faster.
Understand the Mechanism of Paying Off Mortgage
A mortgage is paid off through a mortgage amortization process over the life of the loan in which each payment is first applied to interest accrued during the current payment period and then to reducing the outstanding principle amount.
At the end of a normal payment schedule of a 30-year mortgage, the total amount of accumulated mortgage interests would have always surpassed the initial principle of the loan, if the mortgage interest rate used is above 5.304% (calculation omitted). Even if your rate is lower you can expect the total amount you pay to be close to double your mortgaged amount.
It’s quite a sobering thing to see the total amount of the loan being double what you are borrowing!
Therefore, paying off your mortgage faster essentially saves the borrower from having to pay such a monstrous amount of interest.
Anything can reduce the outstanding principle at any given point, either by making bigger payments from time to time or more frequent payments in addition to regularly scheduled. The goal is to accrue less interest in between payments, as well as reduce the total time during which interests are accrued.
1 – Increase Monthly Payments
Paying off your mortgage faster can save you thousands.
Increasing the amount you pay at originally scheduled payment points whenever you can is something very easy to implement with your lender. Your extra mortgage payment amount would be applied towards further reducing your outstanding principle and thus a less amount of money would be accruing interest.
Make sure you lender knows that the extra payment will go towards reducing the principle!
What can happen in some cases, is the extra amount you pay will go towards your next payment due rather than the principle. This doesn’t help you pay down your principle faster.
2 – Increase Payment Schedule
The normal monthly mortgage payments can be re-scheduled to be on a biweekly basis or even weekly if your financial situation allows. But how frequent the interest compounds should remain on the conventional monthly basis and not to be accelerated by your lender.
More frequent payments help lower the principle amount at their comparing time points.
3 – Change Your Loan to a Shorter Term
If you can really commit to making increased payments on a regular basis, shortening a 30-year mortgage to a 15-year loan would also save you about half of the interest and probably is the fastest way you could pay off your mortgage.
You could also pay extra in such a way that the payments you make would be what you would pay if you had a 15 year loan. Use an online mortgage calculator to figure what your monthly mortgage would be if it were a 15 year rather than a 30 year and use that amount to pay monthly. You’ve basically just created a 15 year loan that give you some cushion if some months you can’t make the higher payment, as you have the 30 year payment to fall back on.
4 – Refinance to a Lower Interest Rate Loan
With a lower interest rate, due to mortgage refinancing, the required monthly mortgage payments would be also lower and if you could maintain the same level of payments as before (with the higher rate), that would be equal to increasing monthly payments, and thus pay off your mortgage faster.
Time is on the side of the banks with a mortgage. What looks like a low rate could add up to hundreds of thousands over the course of thirty years in interest for the bank (and money out of your pocket). Reducing the amount you owe on your principle can save you a ton of money that you could use elsewhere to build wealth. Paying down your mortgage faster will save you far more over the life of your mortgage than most coupon cutting can achieve.
Do you pay down your mortgage faster? How do you do it?
{ 28 comments… read them below or add one }
I would love to refinance but due to the fact that housing prices have gone down so much, much of the 20% down payment we put down is gone, so we’d probably be forced to pay PMI which would negate most if not all of the interest rate savings. So, the plan right now is that when one of the student loans is paid off by the end of the year (hopefully sooner) we will start bumping that over to the mortgage to increase our payments. We’re in year four of a thirty year loan so the interest knocked off during the life of the loan from the extra payments would be substantial enough to make it worth it in my eyes.
We refinanced to a lower interest rate, and then changed our mortgage from a 30 year to a 15. Since our payment was dropping a bit already because of the lower interest rate, it really wasn’t that much more to drop it to a 15 year loan. Worked out great – just 7 more years to go. That sounds so much better than 22!!!
I really like number 2 because most likely it doesn’t require any major changes. Of course for those that are paid on a biweekly basis, the three month paycheck months will be somewhat smaller, but looking at how it affects the amortization table it definitely seems worth it to me.
With mortgage rates being about as low as they may ever be, now is definitely a great time to refinance as well.
May I add some more to this tips. Look for an extra income whether online or find some extra jobs in weekends or after work. Extra income helps you Increase Monthly Payments.
We pay the next month’s principle in between our scheduled mortgage payments. We’re hoping to keep up with that as time goes.
I like to walk by my mortgage bank and payoff bills at a time i.e. if I’ve got an extra $60 bucks I don’t need, I walk in and tell them to apply it to principle.
Nothing is set, but I think I end up paying off about 3 months worth of principal a year with my method.
Sam
That’s a pretty cool idea Sam, I don’t know if I would have the discipline to do this myself, but I also don’t have a mortgage (yet). I think the best part is once you figure out something that works for you, stick to it.
I think most people are creatures of habit. Unless you are really disciplined, sometimes you will not pay extra unless you have too. Perhaps the best thing to do is go with a 15 year mortgage – it really can drop your principle much faster.
I would love to refi as well but it’s certainly not easy. Really without cutting your families monthly expenses…or without making someone else in your family get a job (or higher paying job) it’s nearly impossible. I think what we will actually begin to see in the near term are a bunch of reverse mortgages…esp from the baby boomers.
I agree with all these tactics, but they aren’t as easy to implement as they sound all the time. Sometimes you have to suffer a financial rough patch to make it through your mortgage.
As an hourly wage-slave I’ve added the net of my last few pay raises as well as any overtime or bonus money I receive to my mortgage payment.
I have been paying extra (Item #1) on my mortgage since I bought the house in 1996. I estimate it will shave about 9-10 years off of my mortgage. Once I am mortgage-free, I may go out on my own and leave the 9-5 lifestyle. At least, that is the dream for now.
Sounds like a great plan!
What a great information to share! It’s very informative. Thanks!
having the ability to go on-line now–looking at your mortgage statement/interest and make fastrack daily/monthly payments has completely changed my financial situation.
how i wish i could of done this 20 years ago
all the best everyone
Computer technology has made bill/pay so much easier. I’m horrible at mailing things out but paying online is a snap (though I actually pay my mortgage via check).
“Who wouldn’t want to pay off their mortgage faster?”
Possibly people who can make well over 4% on their money, or those who have a lot of money and want to have a mortgage payment that will probably buy only a pizza in 30 years.
Banks are taking a huge interest rate risk now on fixed-rate mortgages. 4% for 30-year money? That’s insane.
Well, even if I could make more than 4% I’d still like to pay off the mortgage faster. But yes, if you know you can definitely do better with the money…
There are plenty of people out there that still have mortgages over 4% though.
I guess it is a long-term risk for banks but they are getting incentives. But it’s not like a lot of people are getting their refi’s though. And the risk is better then the risk of bankruptcy for some people too.
I wish I would have thought of this sooner in my life. like 2 houses ago we are finally starting to on this house we are about 2-4 payments ahead
You know, there’s so much I wish I knew back in the day. We can’t know everything!
But you’re on it now. That’s great that you are up to 4 payments ahead!
Nice article and this is a very important topic. I try to pay off my mortgage well ahead of time because as you mention, every dollar you pay off today will save you from paying 2, 3 or more over the life of the loan. This is the wonder of compounding interest working against you rather than for you. To get the best possible rate, you should save up a good deposit as well.
Paying off your mortgage faster is a big plus, however, if you are planning to not stay at the same home for the whole 30 or 15 years, it’s not the best idea to make some extra payments…anyone agree?
What’s your reasoning Lior? It’s hard to say without hearing the whole picture. Paying off more gives you more principle in your home and reduces the interest you are paying. What would you do with the money otherwise? How long will you actually stay in the house? Maybe if you know you aren’t staying for a long time then refinancing to a shorter term or an adjustable rate would be better for you?
As you can see, there’s a lot that can go into the best option for you.
Hi glen. Thanks for the replay.
Here is my point:
If you pay extra money every month towards your principle you basically minimize the overall interest of your loan mainly at the end of your loan or the second term of the loan. If I sell my house let’s say 8 years after moving in, than I don’t really “enjoy” those years I was suppose to save on interest. Make sense? if I stay for many years as 20 or more, than I defiantly saved lots of interest. Even if I don’t invest my money somewhere else, It still better to have it on a saving account for a rainy day. Just as an info for you, my current balance is 304,000 on 4.375% interest for another 29 years…I would like to say it’s a decent rate the the bank give me, so what’s the rush give them their money back if I may not stay for so many years at the house and they won’t even get to enjoy their “juice” out of my money. English isn’t my first language so I apologize miss spelling or any other errors…
i just found the question i’ve been dying to find. i would like to reduce my monthly payment which is $2200. i wanted to know if i put my $10,000. tax return to my mortgage will that lower the mortgage. i need to because the monthly payment is killing me.can barely enjoy a cup of coffee,much less a vacation. what do you all think? thanks guys
There are a number of mortgage calculators out there that let you play with the numbers to test out variables. Here’s one: http://www.mortgagecalculator.org/
Another thing to consider is refinancing. I don’t know the details of your loan or your financial situation, but a refinance could potentially save you money on your monthly mortgage.
I had my house paid off using a 15 year mortgage. Time flies and soon the house is paid for. If you could save 100,000. in interest that is way more that I could save other wise. Today’s economy has forced me to refinance the house for another 15 years to keep my small business open. All yo can do is keep plowing. Do the best you can, times will get better.
A 15 year mortgage is a great way to get a lower rate and pay off your mortgage faster. But I think a lot of people find it hard to keep up with the mortgage payments on a 15 year. If you can do it though, that has to be a great feeling to pay off a mortgage that quick.
And yeah, sometimes you do what you have to so you can stay afloat.
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