Chances are your home mortgage is the largest debt you’ll ever have. How would you like to pay it off and run your mortgage contract through the shredder a lot faster than the 30 years for which most homeowners sign up?
Let’s consider some ways to painlessly pay off your home loan sooner. You can choose to do it a little faster or a lot. In some cases, you’ll scarcely notice the added expense.
1. Make biweekly mortgage payments
Since there are 12 months in a year, homeowners make 12 monthly mortgage payments. But if you make half-sized payments every two weeks (biweekly), you’ll make 26 half-payments, the equivalent of 13 full payments.
Essentially, it is like making 13 monthly payments every year rather than the usual 12.
To go this route, call your lender and ask the best way to do it. Some lenders will set you up with biweekly payments. Or you might simply prefer to send in the extra payments by mail or electronically. Whenever you make any extra payment, however, be sure to designate it “apply to principal.” Otherwise, the lender may treat the extra as a prepayment of your next regular monthly payment.
Use a calculator like this one from the Mortgage Professor to see your savings. For example, according to this calculator, if you have a 30-year fixed-rate mortgage at 3.8 percent, making biweekly payments would save $20,573 in interest over the life of the loan and pay off your mortgage four years earlier. That’s a big bang for not many extra bucks.
One thing to avoid: “mortgage acceleration” products and plans. Paying down your mortgage is an easy thing to do, and you shouldn’t have to pay anything to do it. No expertise or pipeline to a higher authority is required. When you see ads and pitches for mortgage “acceleration” plans, programs and products, run the other direction. (Learn more about these gimmicks here.)
2. Pour every bit of extra cash into your mortgage
Dedicate every windfall — a bonus, raise, or holiday or graduation gift — you receive toward paying down debt. Obviously, the highest-interest debt takes priority. But if you have an adequate emergency savings fund and your mortgage is your only debt, don’t even ask yourself what you’ll do with extra money when it falls into your hands: Add it to your mortgage payment, designating it as additional principal.
It’s possible you’ll find better uses for extra cash than paying down your mortgage. For example, if your mortgage rate is 3.8 percent, but you can earn 5 percent on your money elsewhere, you’re obviously going to be better off earning the 5 percent. Read Stacy’s discussion about the pros and cons of using extra cash to pay down your mortgage.
3. Round up your payments
The monthly payment on a $200,000 mortgage at 3.8 percent fixed over 30 years is about $932 a month. Get into the habit of rounding up that amount to $1,000. Or even $1,030, or $1,050. Do it on a regular basis, and you’ll shave years off your mortgage while feeling little pain.
4. Make one extra payment a year
Give yourself a holiday gift by making an extra payment at the end of the year — or at any time. Or, if you’d rather, add an amount equal to one-twelfth of your mortgage payment to each month’s payment.
For instance, with the $932 monthly payments in the example above, one-twelfth is $78. Add that to your normal payment, for a total payment of $1,010, and you’ll shave 30 payments off a 30-year mortgage, paying it off in 26 years instead of 30.
5. Refinance into a shorter loan
Monthly payments are lower on longer-term loans than on shorter-term loans. But borrowers who choose shorter-term loans — such as a 15-year fixed-rate loan instead of a 30-year fixed-rate loan — stand to save a lot of money over the long haul. You can, too.
Follow these three steps to find out what you would save:
- Find current mortgage rates. A good general source is the Freddie Mac weekly mortgage market survey, updated every Thursday. But you can also look at real-life rates available in your area by visiting our mortgage search page.
- Decide if you want a fixed-rate or adjustable-rate mortgage. ARMs are typically cheaper but riskier. Here’s how to decide if an ARM is right for you.
- See what you could save. Use HSH’s amortizing mortgage calculator — choose “show the full table” — to compare the costs and benefits of various options.